KING PHARMACEUTICALS, INC.

Our principal executive offices are located at 501 Fifth Street, Bristol, Tennessee 37620. Our telephone number is (423) 989-8000 and our facsimile number is (423) 274-8677. Our website is www.kingpharm.com where you may view our Corporate Code of Conduct and Ethics. To the extent permitted by U.S. Securities and Exchange Commission (“SEC”) and New York Stock Exchange (“NYSE)” regulations, we intend to disclose information as to any amendments to the Code and any waivers from provisions of the Code for our principal executive officer, principal financial officer, and certain other officers by posting the information on our website. We make available through our website, free of charge, our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments, as well as other documents, as soon as reasonably practicable after their filing. These filings are also available to the public over the Internet at the website of the SEC, at http://www.sec.gov. You may also read and copy any document that we file at the SEC’s Public Reference Room located at 450 Fifth Street, NW, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room.

Our strategy also focuses on growth through the acquisition of novel branded pharmaceutical products in later stages of development and the acquisition of pharmaceutical technologies, particularly those products and technologies that we believe have significant market potential and complement our three key therapeutic areas of focus. Using our internal resources and a disciplined business development process, we strive to be a leader and partner of choice in bringing innovative, clinically-differentiated therapies and technologies to market in our key therapeutic areas. We may also seek company acquisitions that add products or products in development, technologies or sales and marketing capabilities to our key therapeutic areas or that otherwise complement our operations. We also work to achieve organic growth by continuing to develop investigational drugs.

Our Meridian Medical Technologies segment consists of our auto-injector business, which includes EpiPen^®. In March 2006, we acquired the rights to market and sell EpiPen^® throughout Canada until 2015. Royalties, another of our business segments, are derived from products we previously successfully developed and have licensed to third parties. Additionally, we manufacture third-party pharmaceutical products under contracts with a variety of pharmaceutical and biotechnology companies. Accordingly, contract manufacturing represents a segment of our business.

future New Drug Applications (“NDAs”) regarding novel formulations of ramipril and intellectual property, including patent rights and technology licenses relating to these novel formulations. Under certain conditions, Arrow will be responsible for the manufacture and supply of new formulations of ramipril for us. Additionally, we have granted Cobalt Pharmaceuticals, Inc. a non-exclusive right to enter into the U.S. ramipril market with a generic form of the currently marketed Altace^® product, which would be supplied by us. Cobalt is an affiliate of Arrow, but is not a party to the collaboration.

On December 6, 2005, we entered into a cross-license agreement with Mutual Pharmaceutical Company, Inc. Under the terms of the agreement, each party granted the other a license to certain intellectual property relating to metaxalone. Pursuant to the agreement, we paid Mutual $35.0 million and will pay royalties on net sales of metaxalone products. Our current formulation of metaxalone is Skelaxin^®. The royalty rate may increase depending on the achievement of certain regulatory and commercial milestones.

On November 9, 2005, we entered into a collaborative agreement with Pain Therapeutics, Inc. to develop and commercialize Pain Therapeutics’ drug candidate Remoxy™ and other abuse-resistant opioid painkillers. Remoxy™, which is an abuse-resistant version of long-acting oxycodone, is an investigational drug in late-stage clinical development for the treatment of severe to chronic pain. We have worldwide exclusive rights to commercialize Remoxy™ and the other abuse-resistant opioid drugs that are developed pursuant to the collaboration, other than in Australia and New Zealand. Under the terms of the agreement, we made an upfront cash payment of $150.0 million to Pain Therapeutics. We may also make additional cash milestone payments of up to $150.0 million based on the successful clinical and regulatory development of Remoxy™ and other abuse-resistant opioid products. This amount includes a $15.0 million cash payment upon acceptance of a regulatory filing for Remoxy™ and an additional $15.0 million upon its approval. In addition, we will pay all research and development expenses relating to the collaboration up to a maximum of $100.0 million. We will record net sales of all products subject to the collaboration and pay Pain Therapeutics a royalty of 15% of the cumulative net sales up to $1.0 billion and 20% of the cumulative net sales over $1.0 billion. We are also responsible for the payment of third-party royalty obligations of Pain Therapeutics related to products developed under this collaboration.

On August 12, 2004, we entered into a collaborative agreement with Palatin Technologies, Inc. to jointly develop and, on obtaining necessary regulatory approvals, commercialize Palatin’s PT-141 compound, which is also known as bremelanotide, for the treatment of male and female sexual dysfunction. Pursuant to the terms of the agreement, Palatin has granted us a co-exclusive license with Palatin to PT-141 in North America and an exclusive right to collaborate in the licensing or sublicensing of PT-141 with Palatin outside North America. PT-141 is the first compound in a new drug class called melanocortin receptor agonists under development to treat sexual dysfunction. This new chemical entity is being evaluated in Phase II clinical trials studying the efficacy and safety profile of varying doses of this novel compound in men experiencing erectile dysfunction (“ED”) and women experiencing female sexual dysfunction (“FSD”). We paid Palatin approximately $20.0 million on entering into the collaborative agreement, which included a $3.4 million equity investment in Palatin. During the third quarter of 2005, we made an additional equity investment of $10.0 million in Palatin under the terms of the collaborative agreement. This investment reduced the equity portion of the milestone payments due Palatin upon completion of Phase II clinical trials by the same amount. In addition to the initial purchase price and the investment during 2005, we may also pay potential milestone payments to Palatin of up to $90.0 million for achieving certain ED and FSD development and regulatory approval targets. A portion of these milestone payments will consist of additional equity investments in Palatin. After regulatory approval and commercialization of PT-141, we may also pay potential milestone payments to Palatin of up to $130.0 million upon achieving specified annual North American net sales thresholds. We will share all

On June 12, 2003, we acquired the primary care business of Elan Corporation, plc, and that of some of its subsidiaries, in the United States and Puerto Rico, including the rights to Sonata^® and Skelaxin^®, and Elan’s United States primary care field sales force. Product rights subject to the agreement include those related to Sonata^®, a nonbenzodiazepine treatment for insomnia, and Skelaxin^®, a muscle relaxant, in the United States, its territories and possessions, and Puerto Rico. Under the terms of the agreement, Elan’s sale of Skelaxin^® included related NDAs, copyrights, trademarks, patents and rights pertaining to potential new formulations of Skelaxin^®. Elan’s sale of Sonata^® included its rights to the product, as well as certain related copyrights. We also acquired certain intellectual property, regulatory, and other assets relating to Sonata^® directly from Wyeth. The total purchase price of $814.4 million included the cost of acquisition, assumed liabilities and a portion of contingent liabilities. The purchase price also included the transfer of inventory with a value of approximately $40.4 million. In addition to the initial purchase price, we paid $25.0 million during January 2004, as a milestone payment to Elan relating to the ongoing exclusivity of Skelaxin^®. We also pay Wyeth royalties on the current formulation of Skelaxin^® from the date of closing.

On January 8, 2003, we acquired Meridian Medical Technologies, Inc. for $253.9 million in cash paid to Meridian’s shareholders in exchange for their shares of Meridian common stock. Meridian pioneered the development, and is the leading manufacturer, of auto-injectors for the self-administration of injectable drugs. An auto-injector is a pre-filled, pen-like device that allows a patient or caregiver to automatically inject a precise drug dosage quickly, easily, safely and reliably. Meridian’s commercial pharmaceutical products primarily include EpiPen^®, an auto-injector filled with epinephrine for the emergency treatment of anaphylaxis resulting from severe or allergic reactions to insect stings or bites, foods, drugs and other allergens, as well as idiopathic or exercise-induced anaphylaxis. Meridian manufactures EpiPen^® under a supply agreement with Dey L.P., which markets the product. Other Meridian pharmaceutical products include:

The pharmaceuticals industry is a highly competitive global business composed of a variety of participants, including large and small branded pharmaceutical companies, specialty and niche-market pharmaceutical companies, biotechnology firms, large and small research and drug development organizations, and generic drug manufacturers. These participants compete on a number of factors, including technological innovation or novelty, clinical efficacy, safety, convenience or ease of administration and cost-effectiveness. In order to promote their products to physicians and consumers, industry participants devote considerable resources to advertising, marketing and sales force personnel, distribution mechanisms and relationships with medical and research centers, physicians and patient advocacy and support groups.

Cardiovascular/ Metabolic. Altace^®, an angiotensin converting enzyme (“ACE”) inhibitor, is our primary product within this category. In August 1999, the results of the Heart Outcomes Prevention Evaluation trial (the “HOPE trial”) were released. The HOPE trial determined that Altace^® significantly reduces the rates of stroke, myocardial infarction (heart attack) and death from cardiovascular causes in a broad range of high-risk cardiovascular patients. On October 4, 2000, the FDA approved our supplemental NDA (“sNDA”) related to Altace^®. This approval permits the promotion of Altace^® to reduce the risk of stroke, myocardial infarction (heart attack) and death from cardiovascular causes in patients 55 and over, with either a history of coronary artery disease, stroke or peripheral vascular disease, or with diabetes and one other cardiovascular risk factor (hypertension, elevated total cholesterol levels, low high-density lipoprotein (“HDL”) levels, cigarette smoking or documented microalbuminuria). Corgard^® is a beta-blocker indicated for the management of hypertension as well as long-term management of patients with angina pectoris. Altace^® and Corgard^® are marketed primarily to primary care physicians and cardiologists. Levoxyl^® and Cytomel^®, which are indicated for the treatment of thyroid disorders, are marketed primarily to primary care physicians and endocrinologists.

Hospital/ Acute Care. Products in this category are marketed primarily to hospitals. Our largest products in this category are Thrombin-JMI^®, Bicillin^® and Synercid^®. Thrombin-JMI^® aids in controlling minor bleeding during surgery. Synercid^® is an injectable antibiotic, primarily administered in hospitals, indicated for treatment of vancomycin-resistant enterococcus faecium and treatment of some complicated skin and skin structure infections. This category also includes several anti-infective products, including Bicillin^®, that are marketed primarily to general/family practitioners and internal medicine physicians and are prescribed to treat uncomplicated infections of the respiratory tract, urinary tract, eyes, ears and skin. These products are generally in technologically mature product segments. Intal^® and Tilade^® are oral multi-dose inhalers of non-steroidal anti-inflammatory agents indicated for the preventive management of asthma.

Our Meridian Medical Technologies segment consists primarily of our auto-injector business. We pioneered the development, and are a manufacturer, of auto-injectors for the self-administration of injectable drugs. An auto-injector is a pre-filled, pen-like device that allows a patient or caregiver to automatically inject a precise drug dosage quickly, easily, safely and reliably. Auto-injectors are a convenient, disposable, one-time use drug delivery system designed to improve the medical and economic value of injectable drug therapies.

The commercial pharmaceutical business of our Meridian segment primarily consists of EpiPen^®, an auto-injector filled with epinephrine for the emergency treatment of anaphylaxis resulting from severe or allergic reactions to insect stings or bites, foods, drugs and other allergens, as well as idiopathic or exercise-induced anaphylaxis. We have a supply agreement with Dey, L.P., in which we granted Dey the exclusive right to market, distribute, and sell EpiPen^® worldwide. The supply agreement expires December 31, 2015.

Our Meridian segment also includes pharmaceutical products that are presently sold primarily to the DoD, under an Industrial Base Maintenance Contract which is terminable by the DoD at its convenience. These products include the nerve agent antidotes AtroPen^® and ComboPen^®, and the Antidote Treatment Nerve Agent Auto-injector, which we refer to as the “ATNAA.” AtroPen^® is an atropine-filled auto-injector and ComboPen^® consists of an atropine-filled auto-injector and a pralidoxime-filled auto-injector. The ATNAA utilizes a dual chambered auto-injector and injection process to administer atropine and pralidoxime, providing an improved, more efficient means of delivering these nerve agent antidotes. Other products sold to the DoD also include a diazepam-filled auto-injector for the treatment of seizures and a morphine-filled auto-injector for pain management.

We have successfully developed two currently marketed adenosine-based products, Adenoscan^® and Adenocard^®, for which we receive royalty revenues. Specifically, we are party to an agreement under which Astellas Pharma US, Inc. (formerly Fujisawa Healthcare, Inc.) manufactures and markets Adenoscan^® and Adenocard^® in the United States and Canada in exchange for royalties. We have licensed exclusive rights to Sanofi-Aventis SA to manufacture and market Adenocard^® in countries other than the United States, Canada and Japan in exchange for royalties. We have licensed exclusive rights to Sanofi-Aventis to manufacture and market Adenoscan^® in Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Liechtenstein, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom in exchange for royalties. Sanofi-Aventis has received marketing approval for Adenoscan^® in a number of these countries. We have licensed exclusive rights to Suntory to manufacture and market Adenoscan^® and Adenocard^® in Japan in exchange for royalties.

Royalties received by us from sales of Adenoscan^® and Adenocard^® outside of the United States and Canada are shared equally with Astellas. Astellas, on its own behalf and ours, obtained a license to additional intellectual property rights for intravenous adenosine in cardiac imaging and the right to use intravenous adenosine as a cardioprotectant in combination with thrombolytic therapy, balloon angioplasty and coronary bypass surgery. For additional information on our royalty agreements, please see the section below entitled “Intellectual Property.”

We utilize a portion of our excess manufacturing capacity to provide third-party contract manufacturing. We currently provide contract manufacturing for other pharmaceutical and biotechnology companies. Contract manufacturing as a percentage of total revenues equaled approximately 1.3% for the year ended December 31, 2005. We believe contract manufacturing provides a means of absorbing overhead costs and, as such, is an efficient utilization of excess capacity.

Our commercial operations organization, which includes sales and marketing, is based in Princeton, New Jersey. We have a sales force consisting of approximately 1,000 individuals in the United States and Puerto Rico. We distribute our branded pharmaceutical products primarily through wholesale pharmaceutical distributors. These products are ordinarily dispensed to the public through pharmacies by prescription. Our marketing and sales promotions for branded pharmaceutical products principally target general/family practitioners, internal medicine physicians, cardiologists, endocrinologists, neurologists, psychiatrists, pain specialists, sleep specialists and hospitals through detailing and sampling to encourage physicians to prescribe more of our products. The sales force is supported and supplemented by co-promotion arrangements, telemarketing and direct mail, as well as through advertising in trade publications and representation at regional and national medical conventions. Our telemarketing and direct mailing efforts are performed primarily by using a computer sampling system which we developed to distribute samples to physicians. We identify and target physicians through data available from IMS America, Ltd. and Scott-Levin, suppliers of prescriber prescription data. We seek new international markets for product lines for which we have international rights. The marketing and distribution of these products in foreign countries generally require the prior registration of the products in those countries. We generally seek to enter into distribution agreements with companies with established foreign marketing and distribution capabilities since we do not have a distribution mechanism in place for distribution outside the United States and Puerto Rico.

Similar to other pharmaceutical companies, our principal customers are wholesale pharmaceutical distributors. The wholesale distributor network for pharmaceutical products has in recent years been subject to increasing consolidation, which has increased our, and other industry participants’, customer concentration. In addition, the number of independent drug stores and small chains has decreased as retail consolidation has occurred. For the year ended December 31, 2005, approximately 69% of our gross sales

Our manufacturing facilities are located in Bristol, Tennessee; Rochester, Michigan; Middleton, Wisconsin; St. Petersburg, Florida; and St. Louis, Missouri. These facilities have manufacturing, packaging, laboratory, office and warehouse space. We are licensed by the Drug Enforcement Agency, which we refer to as the “DEA,” a division of the Department of Justice, to procure and produce controlled substances. We manufacture certain of our own branded pharmaceutical products, as well as products owned by other pharmaceutical companies under manufacture and supply contracts.

We can produce a broad range of dosage forms, including sterile solutions, lyophylized (freeze-dried) products, injectables, tablets and capsules, creams and ointments, suppositories and powders. We believe our manufacturing capabilities allow us to capture higher margins and pursue drug development and product line extensions more efficiently. We manufacture a portion of the finished dosage form of Altace^® at our Bristol facility. However, currently many of our product lines, including Skelaxin^®, Sonata^®, Delestrogen^®, Intal^®, Tilade^®, Synercid^® and Cortisporin^® are manufactured for us by third parties. As of December 31, 2005, we estimate capacity utilization was approximately 30% at the Bristol facility, approximately 20% at the Rochester facility, approximately 100% at the Middleton facility, approximately 65% at the St. Petersburg facility and approximately 75% at the St. Louis facility.

We are engaged in the development of chemical compounds, including new chemical entities, which provide us with strategic pipeline opportunities for the commercialization of new branded prescription pharmaceutical products. In addition to developing new chemical compounds, we pursue means of enhancing the value of existing products through new uses, formulations, and drug delivery technology that may provide additional benefits to patients and improvements in the quality and efficiency of our manufacturing processes.

In the conduct of our research and development, we utilize a virtual model led by our project management personnel, providing us with substantial flexibility and allowing high efficiency while minimizing internal fixed costs. Utilizing this model, we supplement our internal efforts by collaborating with independent research organizations, including educational institutions and research-based pharmaceutical and biotechnology companies, and contracting with other parties to perform research in their facilities. We use the services of physicians, hospitals, medical schools, universities, and other research organizations worldwide to conduct clinical trials to establish the safety and effectiveness of new products. We seek investments in external research and technologies that hold the promise to complement and strengthen our

Clinical trials are conducted in a series of sequential phases, with each phase designed to address a specific research question. In Phase I clinical trials, researchers test a new drug or treatment in a small group of people to evaluate the drug’s safety, determine a safe dosage range, and identify side effects. In Phase II clinical trials, researchers give the drug or treatment to a larger population to assess effectiveness and to further evaluate safety. In Phase III clinical trials, researchers give the drug or treatment to an even larger population to confirm its effectiveness, monitor side effects, compare it to commonly used treatments, and collect information that will allow the drug or treatment to be used safely. The results of Phase III clinical trials are pivotal for purposes of obtaining FDA approval of a new product.

Our business and our products are subject to extensive and rigorous regulation at both the federal and state levels. Nearly all of our products are subject to pre-market approval requirements. New drugs are approved under, and are subject to, the Food, Drug and Cosmetics Act (“FDC Act”), and related regulations. Biological drugs are subject to both the FDC Act and the Public Health Service Act, which we refer to as the “PHS Act,” and related regulations. Biological drugs are licensed under the PHS Act.

At the federal level, we are principally regulated by the FDA as well as by the DEA, the Consumer Product Safety Commission, the Federal Trade Commission, the U.S. Department of Agriculture, the Occupational Safety and Health Administration, and the U.S. Environmental Protection Agency (“EPA”). The FDC Act, the regulations promulgated thereunder, and other federal and state statutes and regulations, govern, among other things, the development, testing, manufacture, safety, effectiveness, labeling, storage, record keeping, approval, advertising and promotion of our products and those manufactured by and for third parties. Product development and approval within this regulatory framework requires a number of years and involves the expenditure of substantial resources.

When we acquire the right to market an existing approved pharmaceutical product, both we and the former application holder are required to submit certain information to the FDA. This information, if adequate, results in the transfer to us of marketing rights to the pharmaceutical products. We are also required to report to the FDA, and sometimes acquire prior approval from the FDA, certain changes in an approved NDA, as set forth in the FDA’s regulations. When advantageous, we transfer the manufacture of acquired branded pharmaceutical products to other manufacturing facilities which may include our manufacturing facilities, when appropriate, after regulatory requirements are satisfied. In order to transfer manufacturing of acquired products, the new manufacturing facility must demonstrate, by filing information with the FDA, that it can manufacture the product in accordance with current Good Manufacturing Practices, referred to as “cGMPs,” and the specifications and conditions of the approved marketing application. For changes requiring pre-market approval, there can be no assurance that the FDA will grant such approval in a timely manner, if at all.

The FDA and other government agencies periodically inspect drug manufacturing facilities to ensure compliance with applicable cGMP and other regulatory requirements. Failure to comply with these statutory and regulatory requirements subjects the manufacturer to possible legal or regulatory action, such as suspension of manufacturing, seizure of product or recall of a product. Adverse experiences with the use of products must be reported to the FDA and could result in the imposition of market restrictions through labeling changes or in product removal. Product approvals may be withdrawn if compliance with regulatory requirements is not maintained or if problems concerning safety or efficacy of the product occur following approval.

The federal government has extensive enforcement powers over the activities of pharmaceutical manufacturers including the authority to withdraw product approvals, commence actions to seize and prohibit the sale of unapproved or non-complying products, to halt manufacturing operations that are not in compliance with cGMPs, and to impose or seek injunctions, voluntary or involuntary recalls, and civil monetary and criminal penalties. Such a restriction or prohibition on sales or withdrawal of approval of products marketed by us could materially adversely affect our business, financial condition or results of operations.

We also manufacture and sell pharmaceutical products which are “controlled substances” as defined in the Controlled Substances Act and related federal and state laws, which establish certain security, licensing, record keeping, reporting and personnel requirements administered by the DEA and state authorities. The DEA has a dual mission of law enforcement and regulation. The former deals with the illicit aspects of the control of abusable substances and the equipment and raw materials used in making them. The DEA shares enforcement authority with the Federal Bureau of Investigation, another division of the Department of Justice. The DEA’s regulatory responsibilities are concerned with the control of licensed manufacturers, distributors and dispensers of controlled substances, the substances themselves and the equipment and raw materials used in their manufacture and packaging in order to prevent such articles from being diverted into illicit channels of commerce. We maintain appropriate licenses and certificates with the DEA and applicable state authorities in order to engage in the development, manufacturing and distribution of pharmaceutical products containing controlled substances.

The distribution of pharmaceutical products is subject to the Prescription Drug Marketing Act (“PDMA”), a part of the FDC Act, which regulates distribution activities at both the federal and state level. Under the PDMA and its implementing regulations, states are permitted to require registration of manufacturers and distributors who provide pharmaceuticals even if these manufacturers or distributors have no place of business within the state. States are also permitted to adopt regulations limiting the distribution of product samples to licensed practitioners. The PDMA also imposes extensive licensing, personnel record keeping, packaging, quantity, labeling, product handling and facility storage and security requirements intended to prevent the sale of pharmaceutical product samples or other diversions.

We cannot determine what effect new laws, changes in regulations, statutes or legal interpretation, when and if adopted or enacted, may have on our business in the future. New laws, regulations, standards, or interpretations could, among other things, require changes to manufacturing methods, expanded or different labeling, the recall, replacement or discontinuance of certain products, additional record keeping or expanded documentation or could limit the way we advertise and/ or market our products. These changes, or new legislation, could have a material adverse effect on our business, financial condition or results of operations.

Our operations are subject to numerous and increasingly stringent federal, state and local environmental laws and regulations concerning, among other things, the generation, handling, storage, transportation, treatment and disposal of toxic and hazardous substances and the discharge of pollutants into the air and water. Environmental permits and controls are required for some of our operations and these permits are subject to modification, renewal and revocation by the issuing authorities. We believe that our facilities are in substantial compliance with our permits and environmental laws and regulations and do not believe that future compliance with current environmental laws will have a material adverse effect on our business, financial condition or results of operations. Our environmental capital expenditures and costs for environmental compliance may increase in the future as a result of changes in environmental laws and regulations or as a result of increased manufacturing activities at any of our facilities.

Medicis Pharmaceutical Corporation, Watson Pharmaceuticals, Inc., Wyeth, Pfizer Inc., Bristol Myers Squibb, Sanofi Aventis, GlaxoSmithKline and other companies which also acquire branded pharmaceutical products and product lines from, and enter into licensing arrangements with, other pharmaceutical companies. Additionally, since our products are generally established and commonly sold, they are subject to competition from products with similar qualities. Our branded pharmaceutical products may be subject to competition from alternate therapies during the period of patent protection and thereafter from generic equivalents. The manufacturers of generic products typically do not bear the related research and development costs and consequently are able to offer such products at considerably lower prices than the branded equivalents. There are, however, a number of factors which enable products to remain profitable once patent protection has ceased. These include the establishment of a strong brand image with the prescriber or the consumer, supported by the development of a broader range of alternative formulations than the manufacturers of generic products typically supply.

Many of our branded pharmaceutical products have either a strong market niche or competitive position. Some of our branded pharmaceutical products face competition from generic substitutes. For a manufacturer to launch a generic substitute, it must prove to the FDA when filing an application to make a generic substitute that the branded pharmaceutical product and the generic substitute are therapeutically bioequivalent. By focusing our efforts in part on products with patent protection, challenging bioequivalence or complex manufacturing requirements, we believe that we are better positioned to maintain market share and produce sustainable, high margins and cash flows.

The FDA requires that generic applicants claiming invalidity or non-infringement of status listed by a NDA holder give the NDA holder notice each time an abbreviated new drug application (“ANDA,”) is either submitted or amended to claim invalidity or non-infringement of listed patents. If the NDA holder files a patent infringement suit against the generic applicant within 45 days of receiving such notice, the FDA is barred (or stayed) from approving the ANDA for 30 months unless specific events occurred sooner. To avoid multiple 30-month stays for the same branded drug, the relevant provisions of the Hatch-Waxman Act (21 U.S.C. §§ 355(j)(2) and (5)) indicate that a 30-month stay will only attach to patents that are listed in the FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations, which we refer to as the “FDA’s Orange Book,” at the time an ANDA is originally filed. Although the ANDA filer is still required to certify against a newly-listed patent, the NDA holder can still bring suit based upon infringement of that patent, but such a suit will not trigger an additional 30-month stay of FDA approval of the ANDA.

Only patents listed in the FDA’s Orange Book are eligible for protection by a 30-month stay of FDA approval of the ANDA. We are required to list all patents that claim a composition of matter relating to a drug or a method of using a drug. The FDA’s regulations prohibit listing of certain types of patents, including patents claiming certain metabolites (the active moiety that results from the body’s metabolism of the drug substance), intermediates (namely, substances not present in the finished product), certain methods of use, or patents claiming certain product packaging. As such, some patents that may issue are not eligible for listing in the FDA’s Orange Book and thus not eligible for protection by a 30-month stay.

We have exclusive licenses expiring in June 2036 for the prescription formulations of Neosporin^®. These licenses are subject to early termination in the event we fail to meet specified quality control standards, including cGMP regulations with respect to the products, or commit a material breach of other terms and conditions of the licenses which would have a significant adverse effect on the uses of the licensed products retained by the licensor, including, among other things, marketing products under these trade names outside the prescription field.

In addition to the intellectual property for the currently marketed products described above, we also have acquired intellectual property related to various products currently under development. For example, we have acquired rights to intellectual property relating to T-62 and certain related backup compounds currently under development for the treatment for neuropathic pain. In connection with our collaborative agreement with Pain Therapeutics, Inc., we have acquired an exclusive license (subject to preexisting license rights granted by Pain Therapeutics) to certain intellectual property rights related to opioid formulations, including Remoxy™, which is currently in development for the treatment of moderate-to-severe chronic pain. In connection with our collaborative agreement with Palatin Technologies, Inc., we have acquired a co-exclusive license to intellectual property rights related to PT-141, currently being developed for the treatment of male and female sexual dysfunction. Furthermore, in connection with the development of MRE0094, we have acquired exclusive licenses to composition and method patents related to adenosine receptor agonists for the topical treatment of chronic diabetic foot ulcers. Also, we have acquired exclusive rights to patents related to binodenoson, the pharmacologic stress agent specific to the adenosine receptor necessary for increased cardiac blood flow. Also, we have acquired certain intellectual property rights from Mutual Pharmaceutical Company, Inc. related to metaxalone, the active pharmaceutical ingredient in Skelaxin^®, and we have acquired certain intellectual property rights from Arrow related to ramipril, the active pharmaceutical ingredient in Altace,^® as previously discussed.

For a discussion of challenges to our patents by generic drug manufacturers, please see the section entitled “Risk Factors” under the heading “If we cannot successfully enforce our rights under the patents relating to three of our largest products, Altace^®, Skelaxin^® and Sonata^®, and the patent relating to Adenoscan^®, or if we are unable to secure or enforce our rights under other patents, trademarks, trade secrets or other intellectual property, our results of operations could be materially adversely affected.”

As of February 24, 2006, we employed 2,795 full-time and four part-time persons. Approximately 185 employees of the Rochester facility are covered by a collective bargaining agreement with the Paper, Allied Industrial, Chemical & Energy Workers, International Union (PACE), Local No. 60178, which expires on February 28, 2008. Approximately 301 employees of the St. Louis facility are covered by a collective bargaining agreement with the International Brotherhood of Teamsters, Chauffeurs, Warehousemen and Helpers of America Union, Local No. 688, which expires February 28, 2008. We believe our employee relations are good.

You should carefully consider the risks described below and the other information contained in this report, including our audited consolidated financial statements and related notes. The risks described below are not the only ones facing our company. Additional risks not presently known to us or that we currently deem immaterial may also impair our business operations. If any of the adverse events described in this “Risk Factors” section or other sections of this report actually occurs, our business, results of operations and financial condition could be materially adversely affected, the trading price, if any, of our securities could decline and you might lose all or part of your investment.

Subsequent to the announcement of the SEC investigation described in Item 3, “Legal Proceedings”, beginning in March 2003, 22 purported class action complaints were filed by holders of our securities against us, our directors, former directors, our executive officers, former executive officers, a subsidiary, and a former director of the subsidiary in the United States District Court for the Eastern District of Tennessee, alleging violations of the Securities Act of 1933 and/or the Securities Exchange Act of 1934 in connection with our underpayment of rebates owed to Medicaid and other governmental pricing programs, and certain transactions between us and the Benevolent Fund. These 22 complaints have been consolidated in the United States District Court for the Eastern District of Tennessee. In addition, holders of our securities filed two class action complaints alleging violations of the Securities Act of 1933 in Tennessee state court. We removed these two cases to the United States District Court for the Eastern District of Tennessee, where these two cases were consolidated with the other class actions. The district court has appointed lead plaintiffs in the consolidated action, and those lead plaintiffs filed a consolidated amended complaint on October 21, 2003, alleging that we, through some of our executive officers, former executive officers, directors, and former directors, made false or misleading statements concerning our business, financial condition, and results of operations during periods beginning February 16, 1999 and continuing until March 10, 2003. Plaintiffs in the consolidated action have also named the underwriters of our November 2001 public offering as defendants. We and other defendants filed motions to dismiss the consolidated amended complaint.

On August 12, 2004, the United States District Court for the Eastern District of Tennessee ruled on defendants’ motions to dismiss. The Court dismissed all claims as to Jones Pharma Incorporated, a predecessor to one of our wholly owned subsidiaries, King Pharmaceuticals Research and Development, Inc. (“King Research and Development”), and as to defendants Dennis Jones and Henry Richards. The Court also dismissed certain claims as to five other individual defendants. The Court denied the motions to dismiss in all other respects. Following the Court’s ruling, on September 20, 2004, we and the other remaining defendants filed answers to plaintiffs’ consolidated amended complaint. Discovery in this action has commenced. The Court has set a trial date of April 10, 2007.

Additionally, a class action complaint was filed in the United States District Court for the Eastern District of Tennessee under the Employee Retirement Income Security Act, which we refer to as “ERISA.” As amended, the complaint alleged that we and certain of our executive officers, former executive officers, directors, former directors and an employee violated fiduciary duties that they allegedly owed our 401(k) Retirement Savings Plan’s participants and beneficiaries under ERISA. The allegations underlying this action were similar in many respects to those in the class action litigation described above. The defendants filed a motion to dismiss the ERISA action on March 5, 2004. The District Court Judge referred the motion to a Magistrate Judge for a report and recommendation. On December 8, 2004, the Magistrate Judge held a hearing on this motion, and, on December 10, 2004, he recommended that the District Court Judge dismiss the action. The District Court Judge accepted the recommendation and dismissed the case on February 4, 2005. The plaintiffs have not appealed this decision and the deadline for filing any appeal has now passed.

We are unable currently to predict the outcome or reasonably estimate the range of potential loss, if any, except as noted above, in the pending litigation. If we were not to prevail in the pending litigation, or if any governmental sanctions are imposed in excess of those described above, neither of which we can predict or reasonably estimate at this time, our business, financial condition, results of operations and cash flows could be materially adversely affected. Responding to the SEC investigation and defending us in the pending litigation has resulted, and is expected to continue to result, in a significant diversion of management’s attention and resources and the payment of additional professional fees.

Cobalt Pharmaceuticals, Inc. (“Cobalt”), a generic drug manufacturer located in Mississauga, Ontario, Canada, filed an ANDA with the FDA seeking permission to market a generic version of Altace^®. The following U.S. patents are listed for Altace^® in the FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations, which is known as the “Orange Book”; United States Patent No. 5,061,722 (the “ ’722 patent”), a composition-of-matter patent, and United States Patent No. 5,403,856 (the “ ’856 patent”), a method-of-use patent, with expiration dates of October 2008 and April 2012, respectively. Under the Hatch-Waxman Act, any generic manufacturer may file an ANDA with a certification, known as a “Paragraph IV certification,” challenging the validity or infringement of a patent listed in the FDA’s Orange Book four years after the pioneer company obtains approval of its

NDA. Cobalt filed a Paragraph IV certification alleging invalidity of the ’722 patent, and Aventis Pharma Deutschland GmbH (“Aventis”) and the Company filed suit on March 14, 2003, in the District Court for the District of Massachusetts to enforce our rights under that patent. Pursuant to the Hatch-Waxman Act, our filing of that suit provided us an automatic stay of FDA approval of Cobalt’s ANDA for 30 months from no earlier than February 5, 2003. That 30 month stay expired in August 2005 and on October 24, 2005, the FDA granted final approval of Cobalt’s ANDA. In March 2004, Cobalt stipulated to infringement of the ’722 patent. Subsequent to filing our original complaint, we amended our complaint to add an allegation of infringement of the ’856 patent. The ’856 patent covers one of Altace^®’s three indications for use. In response to the amended complaint, Cobalt informed the FDA that it no longer seeks approval to market its proposed product for the indication covered by the ’856 patent. On this basis, the court granted Cobalt summary judgment of non-infringement of the ’856 patent. The court’s decision does not affect Cobalt’s infringement of the ’722 patent. On February 27, 2006, the Company, Aventis and Cobalt agreed that, subject to certain conditions, within 38 days, all parties will submit a joint stipulation dismissing without prejudice the litigation before the U.S. District Court of Massachusetts.

Lupin Ltd. (“Lupin”) filed an ANDA with the FDA seeking permission to market a generic version of Altace^® (“Lupin’s ANDA”). In addition to its ANDA, Lupin filed a Paragraph IV certification challenging the validity and infringement of the ’722 patent, and seeking to market its generic version of Altace^® before expiration of the ’722 patent. In July 2005, we filed civil actions for infringement of the ’722 patent against Lupin in the U.S. District Courts for the District of Maryland and the Eastern District of Virginia. Pursuant to the Hatch-Waxman Act, the filing of the suit against Lupin provides us with an automatic stay of FDA approval of Lupin’s ANDA for up to 30 months from no earlier than June 8, 2005. On February 1, 2006, the Maryland and Virginia cases were consolidated into a single action in the Eastern District of Virginia. Trial is currently scheduled to begin in that action on June 6, 2006.

We intend to vigorously enforce our rights under the ’722 and ’856 patents. If a generic version of Altace^® enters the market, our business, financial condition, results of operations and cash flows could be materially adversely affected. As of December 31, 2005, we had net intangible assets related to Altace^® of $239.5 million. If a generic version of Altace^® enters the market, the Company may have to write off a portion or all of the patent intangible assets and the other intangible assets associated with this product.

Eon Labs, Inc. (“Eon Labs”), CorePharma, LLC (“CorePharma”) and Mutual Pharmaceutical Co. (“Mutual”), Inc. have each filed an ANDA with the FDA seeking permission to market a generic version of Skelaxin^® 400 mg tablets. Additionally, Eon Labs’ ANDA seeks permission to market a generic version of Skelaxin^® 800 mg tablets. United States Patent Nos. 6,407,128 (the “128 patent”) and 6,683,102 (the “102 patent”), two method-of-use patents relating to Skelaxin^®, are listed in the FDA’s Orange Book and

do not expire until December 3, 2021. Eon Labs and CorePharma have each filed Paragraph IV certifications against the ’128 patent and the ’102 patent alleging noninfringement and invalidity of these patents. Mutual has filed a Paragraph IV certification against the ’102 patent alleging noninfringement and invalidity of that patent. A patent infringement suit was filed against Eon Labs on January 2, 2003 in the District Court for the Eastern District of New York; against CorePharma on March 7, 2003 in the District Court for the District of New Jersey (subsequently transferred to the District Court for the Eastern District of New York); and against Mutual on March 12, 2004 in the District Court for the Eastern District of Pennsylvania concerning their proposed 400 mg products. Additionally, we filed a separate suit against Eon Labs on December 17, 2004, in the District Court for the Eastern District of New York concerning its proposed 800 mg product. Pursuant to the Hatch-Waxman Act, the filing of the suit against CorePharma provided us with an automatic stay of FDA approval of CorePharma’s ANDA for 30 months from no earlier than January 24, 2003. Also pursuant to the Hatch-Waxman Act, the filing of the suits against Eon Labs provided us with an automatic stay of FDA approval of Eon Labs’ ANDA for its proposed 400 mg and 800 mg products for 30 months from no earlier than November 18, 2002 and November 3, 2004, respectively. We intend to vigorously enforce our rights under the ’128 and ’102 patents to the full extent of the law.

On March 9, 2004, we received a copy of a letter from the FDA to all ANDA applicants for Skelaxin^® stating that the use listed in the FDA’s Orange Book for the ’128 patent may be deleted from the ANDA applicants’ product labeling. We believe that this decision is arbitrary, capricious, and inconsistent with the FDA’s previous position on this issue. We filed a Citizen Petition on March 18, 2004 (supplemented on April 15, 2004 and on July 21, 2004), requesting the FDA to rescind that letter, require generic applicants to submit Paragraph IV certifications for the ’128 patent, and prohibit the removal of information corresponding to the use listed in the Orange Book. We concurrently filed a Petition for Stay of Action requesting the FDA to stay approval of any generic metaxalone products until the FDA has fully evaluated our Citizen Petition.

On March 12, 2004, the FDA sent a letter to us explaining that our proposed labeling revision, which includes references to additional clinical studies relating to food, age, and gender effects, was approvable and only required certain formatting changes. On April 5, 2004, we submitted amended labeling text that incorporated those changes. On April 5, 2004, Mutual filed a Petition for Stay of Action requesting the FDA to stay approval of our proposed labeling revision until the FDA has fully evaluated and ruled upon our Citizen Petition, as well as all comments submitted in response to that petition. Discussions with the FDA concerning appropriate labeling are ongoing. CorePharma, Mutual and we have filed responses and supplements to the pending Citizen Petition.

If our Citizen Petition is rejected, there is a substantial likelihood that a generic version of Skelaxin^® will enter the market, and our business, financial condition, results of operations and cash flows could be materially adversely affected. In an attempt to mitigate this risk, we have entered into an agreement with a generic pharmaceutical company to launch an authorized generic of Skelaxin^® in the event of generic competition. However, we cannot provide any assurance regarding the degree to which this strategy will be successful, if at all. As of December 31, 2005, we had net intangible assets related to Skelaxin^® of $170.4 million. If demand for Skelaxin^® declines below current expectations, we may have to write off a portion or all of these intangible assets.

Sicor Pharmaceuticals, Inc. (“Sicor”), a generic drug manufacturer located in Irvine California, filed an ANDA with the FDA seeking permission to market a generic version of Adenoscan^®. U.S. Patent No. 5,070,877 (the “ ’877 patent”) is assigned to us and is listed in the FDA’s Orange Book entry for Adenoscan^®. Astellas Pharma US, Inc. (“Astellas”) is the exclusive licensee of certain rights under the ’877 and has marketed Adenoscan^® in the U.S. since 1995. A substantial portion of the revenues from our royalties segment is derived from Astellas from its net sales of Adenoscan^®. Sicor has filed a Paragraph IV certification alleging invalidity of the ’877 patent and non-infringement of certain claims of the ’877 patent. We and Astellas filed suit against Sicor and its parents/affiliates Sicor, Inc., Teva Pharmaceuticals USA, Inc. (“Teva”) and Teva Pharmaceutical Industries, Ltd., on May 26, 2005, in the United States District Court for the District of Delaware to enforce our rights under the ’877 patent. Pursuant to the Hatch-

Teva filed an ANDA with the FDA seeking permission to market a generic version of Sonata^®. In addition to its ANDA, Teva filed a Paragraph IV certification challenging the validity and enforceability of U.S. Patent 4,626,538 (the “ ’538 patent”) listed in the Orange Book which expires in June 2008. We filed suit against Teva in the United States District Court for the District of New Jersey to enforce our rights under the ’538 patent. Pursuant to the Hatch-Waxman Act, our filing of that suit provides us an automatic stay of FDA approval of Teva’s ANDA for 30 months from no earlier than June 21, 2005. We intend to vigorously enforce our rights under the ’538 patent. As of December 31, 2005, we had net intangible assets related to Sonata^® of $12.9 million. If a generic form of Sonata^® enters the market, our business, financial condition, results of operations and cash flows could be materially adversely affected.

We have negotiated and entered into a number of agreements with manufacturers and/or distributors of generic pharmaceutical products with whom we are presently engaged or have previously been engaged in litigation. Governmental and/or private parties may allege that these arrangements violate applicable state or federal anti-trust laws. If a court or other governmental body were to conclude that a violation of these laws had occurred, liability based on such a finding could be material and may adversely affect us.

In October 2005, as part of our settlement of the government pricing investigation of our company (see Item 3. Legal Proceedings, below), we entered into a five-year corporate integrity agreement (“CIA”) with the Office of Inspector General of the United States Department of Health and Human Services (“HHS/ OIG”). The purpose of the CIA, which applies to all of our U.S. subsidiaries and employees, is to promote compliance with the federal health care and procurement programs in which we participate, including the Medicaid Drug Rebate Program, the Medicare Program, the 340B Drug Pricing Program, and the Veterans Administration Pricing Program.

We previously restated our previously issued financial statements for the fiscal years 2002 and 2003, including interim periods in 2003, and the first two quarters of 2004. We may in the future be subject to class action suits, other litigation or regulatory proceedings or actions arising in relation to the restatement of our prior period financial statements. Any expenses incurred in connection with such a potential litigation or regulatory proceeding or action not covered by available insurance or any adverse resolution of this potential litigation or regulatory proceeding or action could have a material adverse effect on our business, results of operations, cash flows and financial condition. Further, any litigation or regulatory proceeding or action may be time-consuming and may distract our management from the conduct of our business.

Under Section 404 of the Sarbanes-Oxley Act of 2002 and the rules issued thereunder, management is required to conduct an evaluation of the effectiveness of our internal control over financial reporting as of each year-end. We are also required to include in our Annual Reports on Form 10-K a report on management’s assessment of the effectiveness of our internal control over financial reporting. Our registered public accounting firm also issues an audit report on management’s assessment and our internal control over financial reporting.

Management has concluded that our internal control over financial reporting was effective as of December 31, 2005 and that it provided reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements in accordance with generally accepted accounting principles. We cannot assure you that management will not identify one or more significant deficiencies or material weaknesses in our internal control over financial reporting during 2006 or thereafter, that the steps we take to address any significant deficiencies or material weaknesses will be successful, that a significant deficiency or material weakness will not result in material errors in our financial statements before it is remediated, that management will be able to complete its assessment of internal control over financial reporting in a timely fashion in 2006 or thereafter, or that management will be able to conclude on the basis of its evaluation that our internal control over financial reporting is effective as of the end of 2006 or a later period.

revenues from continuing operations, respectively, or 80.1% in total. We believe that these sources of revenue may constitute a significant portion of our revenues for the foreseeable future. However, the agreements associated with some sources of royalty income may be terminated upon short notice and without cause or may be subject to substantial competition in the near future. Accordingly, any factor adversely affecting sales of any of these products or products for which we receive royalty payments could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Our charter and bylaws require that we indemnify our directors and officers to the fullest extent provided by applicable Tennessee law. Although we have purchased liability insurance for our directors and officers to fund such obligations, if our insurance carrier should deny coverage, or if the indemnification costs exceed the insurance coverage, we would be forced to bear some or all of these indemnification costs directly, which could be substantial and may have a material adverse effect on our business, financial condition, results of operations and cash flows. If the cost of this insurance increases significantly, or if this insurance becomes unavailable, we may not be able to increase or maintain our levels of insurance coverage for our directors and officers, which could make it difficult to attract or retain qualified directors and officers.

As of December 31, 2005, we had $1.1 billion of net intangible assets and goodwill. Intangible assets primarily include the net book value of various product rights, trademarks, patents and other intangible rights. If a change in circumstances causes us to lower our future sales forecast for a product, we may be required to write off a portion of the net book value of the intangible assets associated with that product. Any impairment of the net book value of any product or combination of products, depending on the size of the product or products, could result in a material adverse effect on our business, financial condition and results of operations. In evaluating goodwill for impairment, we estimate the fair value of our individual business reporting units on a discounted cash flow basis. In the event the value of an individual business reporting unit declines significantly, it could result in a non-cash impairment charge.

Our current strategy is to increase sales of our existing products and to enhance our competitive standing through acquisitions or in-licensing of products, either in development or previously approved by the FDA, that complement our business and enable us to promote and sell new products through existing marketing and distribution channels. Moreover, since we engage in limited proprietary research activity with respect to the development of new chemical entities, we rely heavily on purchasing or licensing products in development and FDA-approved products from other companies.

and thereby have a negative impact on the sales of our existing, newly developed or licensed products. The inability to effect acquisitions or licenses of additional branded products in development and FDA-approved products could limit the overall growth of our business. Furthermore, even if we obtain rights to a pharmaceutical product or acquire a company, we may not be able to generate sales sufficient to create a profit or otherwise avoid a loss. Technological developments or the FDA’s approval of new products or of new therapeutic indications for existing products may make our existing products or those products we are licensing or developing obsolete or may make them more difficult to market successfully, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

requires significant management attention and may require the further expansion of our support personnel, sales force and other human resources. In order to manage our in-license and acquisition activity effectively, we must maintain adequate operational, financial and management information systems, integrate the systems that we acquire into our existing systems, and ensure that the acquired systems meet our standards for internal control over financial reporting. Our future success will also depend in part on our ability to hire, retain and motivate qualified employees to manage expanded operations efficiently and in accordance with applicable regulatory standards. If we cannot manage our third-party collaborations and integrate in-licensed and acquired assets successfully, or, if we do not establish and maintain an appropriate administrative, support and control infrastructure to support these activities, this could have a material adverse effect on our business, financial condition, results of operations and cash flows and on our ability to make the necessary certifications with respect to our internal controls.

Although most of our revenue is generated by products not subject to competition from generic products, there is no proprietary protection for most of our branded pharmaceutical products, and generic substitutes for many of these products are sold by other pharmaceutical companies. Even our products that currently have no generic substitute could face generic competition if generics are developed by other companies and approved by the FDA. The entry of generic substitutes for any of our products could adversely affect our business, financial condition, results of operations and cash flows. In addition, governmental and other pressure to reduce pharmaceutical costs may result in physicians prescribing products for which there are generic substitutes. Also, our branded products for which there is no generic form available may face competition from different therapeutic agents used for the same indications for which our branded products are used. Increased competition from the sale of generic pharmaceutical products or from different therapeutic agents used for the same indications for which our branded products are used may cause a decrease in revenue from our branded products and could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Some of our supply agreements or purchase orders, including those related to Altace^® and Skelaxin^®, require us to purchase certain minimum levels of active ingredients or finished goods. If we are unable to maintain market exclusivity for our products, if our product life-cycle management is not successful, if we fail to sell our products in accordance with the forecasts we develop as required by our supply agreements or if we do not terminate supply agreements at times that are optimal for us, we may incur losses in connection with the purchase commitments under the supply agreements or purchase orders. In the event we incur losses in connection with the purchase commitments under our supply agreements or purchase orders, there may be a material adverse effect upon our results of operations and cash flows.

require specialized and expensive equipment. If we are not in compliance with applicable regulations, the manufacture of our products could be delayed, halted or otherwise adversely affected. Any unforeseen delays or interruptions in our manufacturing operations may reduce our profit margins and revenues. In the event of an interruption, we may not be able to distribute our products as planned. Furthermore, growing demand for our products could exceed our ability to supply the demand. If such situations occur, it may be necessary for us to seek alternative manufacturers, which could adversely impact our ability to produce and distribute our products. We cannot assure you that we would be able to arrange for third parties to manufacture our products in a timely manner or at all. In addition, our manufacturing output may be interrupted by power outages, supply shortages, accidents, natural disasters or other disruptions. Even though we carry business interruption insurance policies, we may suffer losses as a result of business interruptions that exceed the coverage available under our insurance policies.

Many of our product lines, including Altace^®, Skelaxin^®, Sonata^®, Intal^®, Tilade^®, Synercid^® and Cortisporin^®, are currently manufactured in part or entirely by third parties. Our dependence upon third parties for the manufacture of our products may adversely effect our profit margins or may result in unforeseen delays or other problems beyond our control. For example, if any of these third parties are not in compliance with applicable regulations, the manufacture of our products could be delayed, halted or otherwise adversely affected. If for any reason we are unable to obtain or retain third-party manufacturers on commercially acceptable terms, we may not be able to distribute our products as planned. If we encounter delays or difficulties with contract manufacturers in producing or packaging our products, the distribution, marketing and subsequent sales of these products would be adversely affected, and we may have to seek alternative sources of supply or abandon or sell product lines on unsatisfactory terms. We might not be able to enter into alternative supply arrangements at commercially acceptable rates, if at all. We also cannot assure you that the manufacturers we use will be able to provide us with sufficient quantities of our products or that the products supplied to us will meet our specifications.

We have begun construction of facilities to produce Bicillin^® at our Rochester, Michigan location. The third-party manufacturer that produced Bicillin^® for us closed its plant. If our inventory of Bicillin^® is not sufficient to sustain demand during the period we are constructing our Bicillin^® manufacturing facility, or if we experience delays in obtaining regulatory authorizations or experience production difficulties at our Bicillin^® manufacturing facility, sales of this product may be reduced or the market for the product may be permanently diminished, either of which could have a material adverse effect on our business, financial condition, results of operations and cash flows. For the year ended December 31, 2005, net sales of Bicillin^® were $54.0 million, representing 3.0% of our total revenues.

We are also in the process of transferring the manufacture of some of our other products that are currently manufactured by third parties to our manufacturing facilities. We expect to complete these transfers prior to the expiration of the agreements concerning supply of these products. However, we cannot assure you that we will complete the transfers prior to the expiration of the supply agreements, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

We and third parties with whom we contract require a supply of quality raw materials and components to manufacture and package our pharmaceutical products. Currently, we and our third-party manufacturers rely on over 500 suppliers to deliver the necessary raw materials and components. Some of our contracts for the supply of raw materials have short durations, and there is no assurance that we will be able to secure extension of the terms of such agreements. If we or our third-party manufacturers are unable to obtain sufficient quantities of any of the raw materials or components required to produce and package our products, we may not be able to distribute our products as planned.

We develop and manage the development of products and product line extensions through research and development and through contractual relationships with third parties that develop new products, including new product formulations, on our behalf. Our reliance on third parties for the development of some of our products exposes us to risks which could cause delays in the development of new products or reformulated products or could cause other problems beyond our control. These third-party developers

Our results of operations, including, in particular, product sales revenue, may vary from quarter to quarter due to many factors. Sales to wholesalers and distributors represent a substantial portion of our total sales. Buying patterns of our wholesalers and distributors may vary from time to time. In the event wholesalers and distributors with whom we do business determine to limit their purchases of our products, sales of our products could be adversely affected. For example, in advance of an anticipated price increase, many of our customers may order pharmaceutical products in larger than normal quantities. The ordering of excess quantities in any quarter could cause sales of some of our branded pharmaceutical products to be lower in subsequent quarters than they would have been otherwise. As part of our ongoing efforts to facilitate improved management of wholesale inventory levels of our branded pharmaceutical products, we have entered into inventory management and data services agreements with each of our three key wholesale customers. These agreements provide wholesalers incentives to manage inventory levels and provide timely and accurate data with respect to inventory levels held, and valuable data regarding sales and marketplace activity. We rely on the timeliness and accuracy of the data that each customer provides to us on a regular basis pursuant to these agreements. If our wholesalers fail to provide us with timely and accurate data in accordance with the agreements, our estimates for certain reserves included in our financial statements could be materially and adversely affected.

Other factors that may affect quarterly results include expenditures related to the acquisition, sale and promotion of pharmaceutical products, a changing customer base, the availability and cost of raw materials, interruptions in supply by third-party manufacturers, new products introduced by us or our competitors, the mix of products we sell, sales and marketing expenditures, product recalls, competitive pricing pressures and general economic and industry conditions that may affect customer demand. We

Similar to other pharmaceutical companies, our principal customers are primarily wholesale pharmaceutical distributors. The wholesale distributor network for pharmaceutical products has in recent years been subject to increasing consolidation, which has increased our, and other industry participants’, customer concentration. Accordingly, three key customers accounted for approximately 69% of our revenues and a significant portion of our accounts receivable for the fiscal year ended December 31, 2005. The insolvency of any of our principal customers could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Our wholly owned subsidiary, King Research and Development, successor to Jones Pharma Incorporated, is a defendant in 143 multi-defendant lawsuits involving the manufacture and sale of dexfenfluramine, fenfluramine and phentermine, which is usually referred to as “fen/phen.” In 1996, Jones acted as a distributor of Obenix^®, a branded phentermine product. Jones also distributed a generic phentermine product. We believe that Jones’ phentermine products have been identified in less than 100 of the foregoing cases. The plaintiffs in these cases claim injury as a result of ingesting a combination of these weight-loss drugs. They seek compensatory and punitive damages as well as medical care and court-supervised medical monitoring. The plaintiffs claim liability based on a variety of theories including, but not limited to, product liability, strict liability, negligence, breach of warranties and misrepresentation. These suits are filed in various jurisdictions throughout the United States, and in each of these suits King Research and Development is one of many defendants, including manufacturers and other distributors of these drugs. King Research and Development denies any liability incident to the distribution of Jones’ phentermine products and intends to pursue all defenses available to it. King Research and Development has tendered defense of these lawsuits to its insurance carriers for handling and they are currently defending King Research and Development in these suits. In the event that insurance coverage is inadequate to satisfy any resulting liability, King Research and Development will have to resume defense of these lawsuits and be responsible for the damages, if any, that are awarded against it.

For the year ended December 31, 2005, our product Thrombin-JMI^® accounted for 12.4% of our total revenues from continuing operations. The source material for Thrombin-JMI^® comes from bovine plasma and lung tissue which has been certified by the United States Department of Agriculture for use in the manufacture of pharmaceutical products. Bovine-sourced materials, particularly those from outside the United States, may be of some concern because of potential transmission of bovine spongiform encephalopathy, or “BSE.” However, we have taken precautions to minimize the risks of contamination from BSE in our source materials. Our principal precaution is the use of bovine materials only from FDA-approved sources in the United States. Accordingly, all source animals used in our production of Thrombin-JMI^® are of United States origin. Additionally, source animals used in production of Thrombin-JMI^® are generally less than 18 months of age (BSE has not been identified in animals less than 30 months of age).

We have two approved vendors as sources of supply of the bovine raw materials. Any interruption or delay in the supply of these materials could adversely affect the sales of Thrombin-JMI^®. In addition to other actions taken by us and our vendors to minimize the risk of BSE, we are developing steps to further purify the material of other potential contaminants. We will continue surveillance of the source and believe that the risk of BSE contamination in the source materials for Thrombin-JMI^® is very low. While we believe that our procedures and those of our vendor for the supply, testing and handling of the bovine material comply with all federal, state, and local regulations, we cannot eliminate the risk of contamination or injury from these materials. There are high levels of global public concern about BSE. Physicians could determine not to administer Thrombin-JMI^® because of the perceived risk, which could adversely affect our sales of the product. Any injuries resulting from BSE contamination could expose us to extensive liability. Also, there is currently no alternative to the bovine-sourced materials for Thrombin-JMI^®. If public concern for the risk of BSE infection in the United States should increase, the manufacture and sale of Thrombin-JMI^® and our business, financial condition, results of operations and cash flows could be materially and adversely affected.

The FDA expects manufacturers of biological products to have validated processes capable of removing extraneous viral contaminants to a high level of assurance. As a result, many manufacturers of biologics are currently engaged in developing procedures to remove potential extraneous viral contaminants from their products. We are in the process of developing appropriate processing steps to achieve maximum assurance for the removal of potential extraneous viral contaminants from Thrombin-JMI^®, which does not include BSE because it is not a viral contaminant. If we are not successful in gaining FDA approval for these processes, our ability to manufacture Thrombin-JMI^® may be adversely affected. We cannot assure you that we will be successful in these efforts. Failure to obtain the FDA’s approval for these procedures could have a material adverse effect on our business, financial condition, results of operations and cash flows.

During the fourth quarter of 2001, we issued 2³/4% Convertible Debentures due November 15, 2021 in an aggregate amount of $345.0 million. The price at which the debentures are convertible into common stock is $50.16, subject to adjustments spelled out in the documents governing the debentures. If the price of our stock has not reached that amount by November 15, 2006 and the debentures are not refinanced or repurchased, we may be required to repurchase all or a portion of the debentures representing the $345.0 million on November 15, 2006 if some or all of the holders of the debentures request that we repurchase their debentures. Alternatively, we may elect to repurchase some or all of the debentures, by negotiation with debenture holders, a buy-back program, or a tender offer, prior to November 15, 2006. We cannot assure you that a significant repurchase would not have a material adverse effect on our business, financial condition, results of operations, cash flows or liquidity.

Dey, L.P. markets our EpiPen^® auto-injector through a supply agreement with us that expires on December 31, 2015. Under the terms of the agreement, we grant Dey the exclusive right and license to market, distribute and sell EpiPen^® worldwide. We understand that a new competitive product received FDA approval and entered the market in the third quarter of 2005. The new product, TwinJect^® Auto-Injector (epinephrine) injection, is not a therapeutically equivalent product but has the same indications, same usage and the same route of delivery as EpiPen^®. Users of EpiPen^® would have to obtain a new prescription in order to substitute TwinJect^®. The supply agreement with Dey includes minimum purchase requirements that are less than Dey’s purchases in recent years. A failure by Dey to successfully market and distribute EpiPen^® or an increase in competition could have a material adverse effect on our business, financial condition, results of operations and cash flows.

All U.S. government contracts provide that they may be terminated for the convenience of the government as well as for default. Our Meridian Medical Technologies segment has pharmaceutical products that are presently sold primarily to the DoD under an Industrial Base Maintenance Contract (“IBMC”). The current IBMC expires in July 2006. Although we have reason to believe the DoD will renew the IBMC based on our relationship of many years, we cannot assure you that they will. In the event the DoD does not renew the IBMC, our business, financial condition, results of operations and cash flows could be materially adversely affected. Additionally, the unexpected termination of one or more of our significant government contracts could result in a material adverse effect on our business, financial condition, results of operations and cash flows. A surge capability provision allows for the coverage of defense mobilization requirements in the event of rapid military deployment. If this surge capability provision becomes operative, we may be required to devote more of our Meridian Medical Technologies segment manufacturing capacity to the production of products for the government which could result in less manufacturing capacity being devoted to products in this segment with higher profit margins.

Our supply contracts with the DoD are subject to post-award audit and potential price determination. These audits may include a review of our performance on the contract, our pricing practices, our cost structure and our compliance with applicable laws, regulations and standards. Any costs found to be improperly allocated to a specific contract will not be reimbursed, while costs already reimbursed must be refunded. Therefore, a post-award audit or price redetermination could result in an adjustment to our revenues. From time to time the DoD makes claims for pricing adjustments with respect to completed contracts. If a government audit uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeitures of profits, suspension of payments, fines and suspension or disqualification from doing business with the government.

Other risks involved in government sales include the unpredictability in funding for various government programs and the risks associated with changes in procurement policies and priorities. Reductions in defense budgets may result in reductions in our revenues. We also provide our nerve agent antidote auto-injectors to a number of state agencies and local communities for homeland defense against chemical agent terrorist attacks. Changes in governmental and agency procurement policies and priorities may also result in a reduction in government funding for programs involving our auto-injectors. A loss in government funding of these programs could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Since 2003, we have implemented new information technology systems that are intended to significantly enhance the accuracy of our calculations for estimating amounts due under Medicaid and other governmental pricing programs; however, our processes for these calculations and the judgments involved in making these calculations will continue to involve subjective decisions, and, as a result, these calculations will remain subject to the risk of errors.

For example, for efficiency, we rely upon a central distribution facility, located in Bristol, Tennessee. An interruption in operations at this facility could limit our ability to deliver our products to customers. Similarly, our business depends upon centralized electronic communication, analysis and recordkeeping systems. Damage to these systems could limit the normal operation of many aspects of our business, such as receipt and processing of orders, shipment of products to customers, internal communications and maintenance of financial and other records.

Under government regulations, chlorofluorocarbon compounds are being phased out because of environmental concerns. Our products Intal^® and Tilade^® currently use these compounds as propellants. The FDA has issued an approvable letter with respect to the new drug application, or “NDA” covering a new inhaler for Intal^® using the alternative propellant HFA. The approvable letter provides that final approval of the NDA for Intal^® HFA is subject to addressing certain FDA comments solely pertaining to the chemistry, manufacturing, and controls section of the NDA covering the product. In the event we cannot also obtain final approval for alternative propellants for Intal^® and Tilade^® before the final phase-out date for use of chlorofluorocarbon compounds or if we are unable to maintain an adequate supply of chlorofluorocarbon compounds for the production of these products prior to this date, our ability to market these products could be materially adversely affected, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Our Co-Promotion Agreement with Wyeth results in our having less control over the promotion of Altace^® than we would have in the absence of the Agreement. Further, we believe that we presently realize less operating income from the sale of Altace^® than we would realize if the Agreement were terminated. Because of these factors, among others, as well as contractual disputes existing between Wyeth and us, we have sought, and may continue to seek, the termination of the Agreement.

Should Wyeth reduce the resources dedicated to the marketing of Altace^®, or should the Co-Promotion Agreement be terminated, then we may need to expand our marketing capabilities, or enter into another collaborative arrangement, to ensure that appropriate sales and marketing resources are devoted to Altace^®. Such efforts would require substantial time, effort and resources, and we may not be able to recruit and retain appropriate sales and marketing resources or enter into another collaborative arrangement. Any significant reduction in the sales and marketing resources devoted to Altace^® could have a material adverse effect on sales of Altace^® and on our business, financial conditions, results of operations and cash flows.

We have a shareholder rights plan that may have the effect of discouraging unsolicited takeover proposals. The rights issued under the shareholder rights plan would cause substantial dilution to a person or group which attempts to acquire us on terms not approved in advance by our Board of Directors. In addition, our charter and bylaws contain provisions that may discourage unsolicited takeover proposals that shareholders may consider to be in their best interests. These provisions include

Virtually all aspects of our activities are regulated by federal and state statutes and government agencies. The manufacturing, processing, formulation, packaging, labeling, distribution and advertising of our products, and disposal of waste products arising from these activities, are subject to regulation by one or more federal agencies, including the FDA, the Drug Enforcement Agency, which we refer to as the “DEA,” the Federal Trade Commission, the Consumer Product Safety Commission, the U.S. Department of Agriculture, the Occupational Safety and Health Administration, and the Environmental Protection Agency (“EPA,”), as well as by foreign governments in countries where we distribute some of our products.

Noncompliance with applicable FDA policies or requirements could subject us to enforcement actions, such as suspensions of manufacturing or distribution, seizure of products, product recalls, fines, criminal penalties, injunctions, failure to approve pending drug product applications or withdrawal of product marketing approvals. Similar civil or criminal penalties could be imposed by other government agencies, such as the DEA, the EPA or various agencies of the states and localities in which our products are manufactured, sold or distributed, and could have ramifications for our contracts with government agencies such as the Department of Veterans Affairs or the Department of Defense. These enforcement actions could have a material adverse effect on our business, financial condition, results of operations and cash flows.

All manufacturers of human pharmaceutical products are subject to regulation by the FDA under the authority of the Food, Drug and Cosmetics Act (the “FDC Act”), or the Public Health Service Act (the “PHS Act”), or both. New drugs, as defined in the FDC Act, and new human biological drugs, as defined in the PHS Act, must be the subject of an FDA-approved new drug or biologic license application before they may be marketed in the United States. Some prescription and other drugs are not the subject of an approved marketing application but, rather, are marketed subject to the FDA’s regulatory discretion and/or enforcement policies. Any change in the FDA’s enforcement discretion and/or policies could have a material adverse effect on our business, financial condition, results of operations and cash flows.

We manufacture some pharmaceutical products containing controlled substances and, therefore, are also subject to statutes and regulations enforced by the DEA and similar state agencies which impose security, record keeping, reporting and personnel requirements on us. Additionally, we manufacture biological drug products for human use and are subject to regulatory obligations as a result of these aspects of our business. There are additional FDA and other regulatory policies and requirements covering issues, such as advertising, commercially distributing, selling, sampling and reporting adverse events associated with our products, with which we must continuously comply. Noncompliance with any of these policies or requirements could result in enforcement actions which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

The FDA has the authority and discretion to withdraw existing marketing approvals and to review the regulatory status of marketed products at any time. For example, the FDA may require an approved marketing application for any drug product marketed if new information reveals questions about a drug’s safety or efficacy. All drugs must be manufactured in conformity with current Good Manufacturing Practices and drug products subject to an approved application must be manufactured, processed, packaged, held and labeled in accordance with information contained in the approved application.

is subject to challenge by the FDA at any time. Through various enforcement mechanisms, the FDA can ensure that noncomplying drugs are no longer marketed and that advertising and marketing materials and campaigns are in compliance with FDA regulations. In addition, modifications, enhancements, or changes in manufacturing sites of approved products are in many circumstances subject to additional FDA approvals which may or may not be received and which may be subject to a lengthy FDA review process. Our manufacturing facilities and those of our third-party manufacturers are continually subject to inspection by governmental agencies. Manufacturing operations could be interrupted or halted in any of those facilities if a government or regulatory authority is unsatisfied with the results of an inspection. Any interruptions of this type could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Under the Comprehensive Environmental Response, Compensation, and Liability Act, which we refer to as “CERCLA,” the EPA can impose liability for the entire cost of cleanup of contaminated properties upon each or any of the current and former site owners, site operators or parties who sent waste to the site, regardless of fault or the legality of the original disposal activity. In addition, many states, including Tennessee, Michigan, Wisconsin, Florida and Missouri, have statutes and regulatory authorities similar to CERCLA and to the EPA. We have entered into hazardous waste hauling agreements with licensed third parties to properly dispose of hazardous wastes. We cannot assure you that we will not be found liable under CERCLA or other applicable state statutes or regulations for the costs of undertaking a cleanup at a site to which our wastes were transported.

We cannot determine what effect changes in regulations, enforcement positions, statutes or legal interpretations, when and if promulgated, adopted or enacted, may have on our business in the future. These changes could, among other things, require modifications to our manufacturing methods or facilities, expanded or different labeling, new approvals, the recall, replacement or discontinuance of certain products, additional record keeping and expanded documentation of the properties of certain products and scientific substantiation. These changes, or new legislation, could have a material adverse effect on our business, financial condition, results of operations and cash flows.

We face an inherent business risk of exposure to product liability claims in the event that the use of our technologies or products is alleged to have resulted in adverse effects. These risks exist for products in clinical development and with respect to products that have received regulatory approval for commercial sale. While we have taken, and will continue to take, what we believe are appropriate precautions, we may not be able to avoid significant product liability exposure. We currently have product liability insurance in the amount of $80.0 million for aggregate annual claims including a $20.0 million self-insured retention; however, we cannot assure you that the level or breadth of any insurance coverage will be sufficient to cover fully all potential claims. Also, adequate insurance coverage might not be available in the future at acceptable costs, if at all. For example, we are now not able to obtain product liability insurance with respect to our products Menest^®, Delestrogen^® and Pitocin^®, each a women’s healthcare product. With respect to any product liability claims relating to these products, we could be responsible for any monetary damages awarded by any court or any voluntary monetary settlements. Significant judgments against us for product liability for which we have no insurance could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Product recalls or product field alerts may be issued at our discretion or at the discretion of the FDA, other government agencies or other companies having regulatory authority for pharmaceutical product sales. From time to time, we may recall products for various reasons, including failure of our products to maintain their stability through their expiration dates. Any recall or product field alert has the potential of damaging the reputation of the product. To date, these recalls have not been significant and have not had a material adverse effect on our business, financial condition, results of operations or cash flows. However, we cannot assure you that the number and significance of recalls will not increase in the future. Any significant recalls could materially affect our sales and the prescription trends for the products and damage

Commercial success in producing, marketing and selling branded prescription pharmaceutical products depends, in part, on the availability of adequate reimbursement from third-party health care payors, such as the government, private health insurers and managed care organizations. Third-party payors are increasingly challenging whether to reimburse certain pharmaceutical products and medical services. For example, many managed health care organizations limit reimbursement of pharmaceutical products. These limits may take the form of formularies with differential co-pay tiers. The resulting competition among pharmaceutical companies to maximize their product reimbursement has generally reduced growth in average selling prices across the industry. We cannot assure you that our products will be appropriately reimbursed or included on the formulary lists of managed care organizations or that downward pricing pressures in the industry generally will not negatively impact our operations.

The commercial success of some of our products depends, in part, on whether third-party reimbursement is available for the use of our products by hospitals, clinics, doctors, pharmacies and patients. Third-party payors include state and federal governments, under programs such as Medicaid and other entitlement programs, as well as managed care organizations, private insurance plans and health maintenance organizations. Because of the growing size of the patient population covered by third party reimbursement, it is important to our business that we market our products to reimbursers that serve many of these organizations. Payment or reimbursement of only a portion of the cost of our prescription products could make our products less attractive, from a net-cost perspective, to patients, suppliers, retail pharmacies and prescribing physicians. Managed care organizations and other third-party payors try to negotiate the pricing of products to control their costs. Managed care organizations and pharmacy benefit managers typically develop reimbursement coverage strategies, including formularies, to reduce their cost for medications. Formularies can be based on the prices and/or therapeutic benefits of the available products. Due to their lower costs, generics receive more favorable reimbursement. The breadth of the products reimbursed varies considerably from one managed care organization to another, and many formularies include alternative and competitive products or therapies for treatment of particular medical conditions. Denial of a product from reimbursement can lead to its sharply reduced usage in the managed care organization patient population. If our products are not included within an adequate number of formularies or adequate reimbursement levels are not provided, or if those policies increasingly favor generic products, our market share and gross margins could be negatively affected, as could our overall business and financial condition.

We have addressed our contract relationship with managed care organizations in an effort to increase the attractiveness of reimbursements for our products. We take reserves for the estimated amounts of rebates we will pay to managed care organizations each quarter. Any increased usage of our products through Medicaid or managed care programs will increase the amount of rebates that we owe. We cannot assure you that our products will be included on the formulary lists of managed care organizations or that adverse reimbursement issues will not have a material effect on our business, financial condition, results of operations or cash flows.

We are subject to various federal and state laws pertaining to health care “fraud and abuse,” including anti-kickback laws and false claims laws. Anti-kickback laws make it illegal for a prescription drug manufacturer to solicit, offer, receive, or pay any remuneration in exchange for, or to include, the referral of business, including the purchase or prescription of a particular drug. The federal government has published regulations that identify “safe harbors” or exemptions for certain payment arrangements that do not violate the anti-kickback statutes. We seek to comply with these safe harbors. Due to the breadth of

the statutory provisions and the absence of guidance in the form of regulations or court decisions addressing some of our practices, it is possible that our practices might be challenged under anti-kickback or similar laws. False claims laws prohibit anyone from knowingly (in the civil context), or knowingly and willfully (in the criminal context), presenting, or causing to be presented for payment to third-party payors (including Medicaid and Medicare) claims for reimbursed drugs or services that are false or fraudulent, claims for items or services not provided as claimed, or claims for medically unnecessary items or services. Our activities relating to the sale and marketing of our products are currently a subject of investigation by the Office of Inspector General, and as such they are likely to be subject to scrutiny under these laws.

From time to time studies or clinical trials on various aspects of pharmaceutical products are conducted by academics or others, including government agencies, the results of which, when published, may have dramatic effects on the markets for the pharmaceutical products that are the subject of the study. The publication of negative results of studies or clinical trials related to our products or the therapeutic areas in which our products compete could adversely affect our sales, the prescription trends for our products and the reputation of our products. In the event of the publication of negative results of studies or clinical trials related to our branded pharmaceutical products or the therapeutic areas in which our products compete, our business, financial condition, results of operations and cash flows could be materially adversely affected. Additionally, potential write-offs of the intangible assets associated with the affected products could materially adversely affect our results of operations.

A number of legislative and regulatory proposals aimed at changing the health care system, including the cost of prescription products, importation and reimportation of prescription products from countries outside the United States and changes in the levels at which pharmaceutical companies are reimbursed for sales of their products, have been proposed. While we cannot predict when or whether any of these proposals will be adopted or the effect these proposals may have on our business, these proposals, as well as the adoption of any proposal, may exacerbate industry-wide pricing pressures and could have a material adverse effect on our business, financial condition, results of operations and cash flows. For example, in 2000, Congress directed the FDA to adopt regulations allowing the reimportation of approved drugs originally manufactured in the United States back into the United States from other countries where the drugs were sold at a lower price. Although the Secretary of Health and Human Services has refused to implement this directive, in July 2003 the House of Representatives passed a similar bill that does not require the Secretary of Health and Human Services to act. The reimportation bills have not yet resulted in any new laws or regulations; however, these and other initiatives could decrease the price we receive for our products. Additionally, sales of our products in the United States could be adversely affected by the importation of products that some may deem to be equivalent to ours that are manufactured by others and are available outside the United States. Many States have implemented or are in the process of implementing regulations requiring pharmaceutical companies to provide them with certain marketing and pricing information. While we intend to comply with these regulations, we are unable at this time to predict or estimate the effect of these regulations, if any.

Changes in the Medicare, Medicaid or other governmental programs or the amounts paid by those programs for our services may adversely affect our earnings. These programs are highly regulated and subject to frequent and substantial changes and cost containment measures. In recent years, changes in these programs have limited and reduced reimbursement to providers. The Medicare Prescription Drug, Improvement and Modernization Act of 2003, creates a voluntary prescription drug benefit under the

Social Security Act, which we refer to as “Medicare Drug Benefit.” Beginning in 2006, Medicare beneficiaries entitled to Part A or enrolled in Part B, as well as certain other Medicare enrollees, are eligible for the Medicare Drug Benefit. Regulations implementing the Medicare Drug Benefit were published January 28, 2005. The Medicare Drug Act requires that the Federal Trade Commission conduct a study and make recommendations regarding additional legislation that may be needed concerning the Medicare Drug Benefit. We are unable at this time to predict or estimate the financial effect of this new legislation.

We also compete with pharmaceutical companies in marketing and selling pharmaceutical products. The selling prices of pharmaceutical products typically decline as competition increases. Further, other products now in use, developed or acquired by other pharmaceutical companies may be more effective or offered at lower prices than our current or future products. Competitors may also be able to complete the regulatory process sooner and, therefore, may begin to market their products in advance of ours. We believe that competition for sales of our products will continue to be based primarily on product efficacy, safety, reliability, availability and price.

Competition for Acquisitions and In-License Opportunities. We compete with other pharmaceutical companies for product and product line acquisitions and in-license opportunities. These competitors include Biovail Corporation, Forest Laboratories, Inc., Medicis Pharmaceutical Corporation, Shire Pharmaceuticals Group plc, Watson Pharmaceuticals, Inc., Wyeth, Pfizer, Inc., Bristol Myers Squibb, Sanofi Aventis, GlaxoSmithKline and other companies which either in-license pharmaceutical product opportunities or compounds, or acquire branded pharmaceutical products and product lines, including those in development, from other biotech, pharmaceutical or bio-pharma companies. We cannot assure you that

The manufacturers of generic products typically do not bear the related research and development costs and, consequently, are able to offer such products at considerably lower prices than the branded equivalents. We cannot assure you that any of our products will remain exclusive without generic competition, or maintain their market share, gross margins and cash flows as a result of these efforts, the failure of which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

These forward-looking statements are identified by their use of terms and phrases, such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will” and other similar terms and phrases, including references to assumptions. These statements are contained in the “Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections, as well as other sections of this report.

On October 31, 2005, we entered into (i) a definitive settlement agreement with the United States of America, acting through the United States Department of Justice and the United States Attorney’s Office for the Eastern District of Pennsylvania and on behalf of the Office of Inspector General of the United States Department of Health and Human Services (“HHS/ OIG”) and the Department of Veterans Affairs, to resolve the governmental investigations related to our underpayment of rebates owed to Medicaid and other governmental pricing programs during the period from 1994 to 2002 (the “Federal Settlement Agreement”), and (ii) similar settlement agreements with 48 states and the District of Columbia (collectively, the “State Settlement Agreements”, and together with the Federal Settlement Agreement, the “Settlement Agreements”). We have agreed to a settlement with the remaining state on substantially the same terms as the other state settlements, and we currently expect to enter into a definitive settlement agreement with that state before the end of the first quarter of 2006. Consummation of the Federal Settlement Agreement and some State Settlement Agreements is or was subject to court approval. On February 24, 2006, the United States District Court for the Eastern District of Pennsylvania (“District Court”) approved the Federal Settlement Agreement. All interested parties, including King, the individual purportedly acting as a “relator” under the False Claims Act and the affected states, have requested that the District Court approve the State Settlement Agreements that require court approval.

Pursuant to the Settlement Agreements, we agreed to pay a total of approximately $124.1 million (the “Settlement Amount”) and interest on the Settlement Amount at the rate of 3.75% from July 1, 2005 to the date of consummation of the settlement. We have further agreed to pay, subject to certain conditions, (i) legal fees relating to the settlement in the amount of approximately $0.8 million, and (ii) approximately $1.0 million in settlement costs. The Settlement Amount includes approximately $50.6 million for payment to 49 states and the District of Columbia. The Settlement Amount includes approximately $63.7 million representing the amount of underpayments to Medicaid and other governmental pricing programs from 1994 to 2002 and approximately $60.4 million to cover interest, penalties and other costs.

We accrued in prior years a total of $130.4 million in respect of our estimated underpayments to Medicaid and other governmental pricing programs and estimated settlement costs with all relevant governmental parties, which sum is classified as restricted cash and an accrued expense on our balance sheet. This sum is sufficient to cover the full cost of all sums owed the federal and state governments pursuant to the Settlement Agreements, together with related obligations to reimburse the expenses of some of the parties.

As previously reported, the SEC has also been conducting an investigation relating to our underpayments to governmental programs, as well as into our previously disclosed errors relating to reserves for product returns. While the SEC’s investigation is continuing with respect to the product returns issue, the Staff of the SEC has advised us that it has determined not to recommend enforcement action against us with respect to the aforementioned governmental pricing matter. The Staff of the SEC notified us of this determination pursuant to the final paragraph of Securities Act Release 5310. Although the SEC could still consider charges against individuals in connection with the governmental pricing matter, we do not believe that any governmental unit with authority to assert criminal charges is considering any charges of that kind.

Subsequent to the announcement of the SEC investigation described above, beginning in March 2003, 22 purported class action complaints were filed by holders of our securities against us, our directors, former directors, our executive officers, former executive officers, a subsidiary, and a former director of the subsidiary in the United States District Court for the Eastern District of Tennessee, alleging violations of the Securities Act of 1933 and/or the Securities Exchange Act of 1934, in connection with our underpayment of rebates owed to Medicaid and other governmental pricing programs, and certain transactions between us and the Benevolent Fund. These 22 complaints have been consolidated in the United States District Court for the Eastern District of Tennessee. In addition, holders of our securities filed two class action complaints alleging violations of the Securities Act of 1933 in Tennessee state court. We removed these two cases to the United States District Court for the Eastern District of Tennessee, where these two cases were consolidated with the other class actions. The district court has appointed lead plaintiffs in the consolidated action, and those lead plaintiffs filed a consolidated amended complaint on October 21, 2003 alleging that we, through some of our executive officers, former executive officers, directors, and former directors, made false or misleading statements concerning our business, financial condition, and results of operations during periods beginning February 16, 1999 and continuing until March 10, 2003. Plaintiffs in the consolidated action have also named the underwriters of our November 2001 public offering as defendants. We and other defendants filed motions to dismiss the consolidated amended complaint.

On August 12, 2004, the United States District Court for the Eastern District of Tennessee ruled on defendants’ motions to dismiss. The Court dismissed all claims as to Jones Pharma Incorporated, a predecessor to one of our wholly owned subsidiaries, King Pharmaceuticals Research and Development, Inc., and as to defendants Dennis Jones and Henry Richards. The Court also dismissed certain claims as to five other individual defendants. The Court denied the motions to dismiss in all other respects. Following the Court’s ruling, on September 20, 2004, we and the other remaining defendants filed answers to plaintiffs’ consolidated amended complaint. Discovery in this action has commenced. The Court has set a trial date of April 10, 2007.

Beginning in March 2003, four purported shareholder derivative complaints were also filed in Tennessee state court alleging a breach of fiduciary duty, among other things, by some of our current and former officers and directors, with respect to the same events at issue in the federal securities litigation described above. These cases have been consolidated, and on October 3, 2003, plaintiffs filed a consolidated amended complaint. On November 17, 2003, defendants filed a motion to dismiss or stay the consolidated amended complaint. The court denied the motion to dismiss, but granted a stay of proceedings. On October 11, 2004, the court lifted the stay to permit plaintiffs to file a further amended complaint adding class action claims related to our then-anticipated merger with Mylan Laboratories, Inc. On October 26, 2004, defendants filed a partial answer to the further amended complaint, and moved to dismiss the newly-added claims. Following the termination of the Mylan merger agreement, plaintiffs voluntarily dismissed these claims. Discovery with respect to the remaining claims in the case has commenced. No trial date has been set.

Additionally, a class action complaint was filed in the United States District Court for the Eastern District of Tennessee under the Employee Retirement Income Security Act (“ERISA”). As amended, the complaint alleges that we and certain of our executive officers, former executive officers, directors, former directors and an employee violated fiduciary duties that they allegedly owed our 401(k) Retirement Savings Plan’s participants and beneficiaries under ERISA. The allegations underlying this action are similar in many respects to those in the class action litigation described above. The defendants filed a motion to dismiss the ERISA action on March 5, 2004. The District Court Judge referred the motion to a Magistrate Judge for a report and recommendation. On December 8, 2004, the Magistrate Judge held a hearing on this motion, and, on December 10, 2004, he recommended that the District Court Judge dismiss the action. The District Court Judge accepted the recommendation and dismissed the case on February 4, 2005. The plaintiffs have not appealed this decision, and the deadline for filing any appeal has now passed.

Cobalt Pharmaceuticals, Inc. (“Cobalt”) filed an ANDA with the FDA seeking permission to market a generic version of Altace^®. The following U.S. patents are listed for Altace^® in the FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations, which is known as the “Orange Book”: U.S. Patent No. 5,061,722, the (“’722 patent”), a composition-of-matter patent related to Altace^®, and U.S. Patent No. 5,403,856, the (“’856 patent”), a method-of-use patent related to Altace^®, with expiration dates of October 2008 and April 2012, respectively. Under the Hatch-Waxman Act, any generic manufacturer may file an ANDA with Paragraph IV certification challenging the validity or infringement of a patent listed in the FDA’s Orange Book four years after the pioneer company obtains approval of its NDA. Cobalt filed a Paragraph IV certification alleging invalidity of the ’722 patent, and Aventis and the Company filed suit on March 14, 2003 in the District Court for the District of Massachusetts to enforce our rights under that patent. Pursuant to the Hatch-Waxman Act, the filing of that suit provided us an automatic stay of FDA approval of Cobalt’s ANDA for 30 months from no earlier than February 5, 2003. That 30 month stay expired in August 2005 and on October 24, 2005, the FDA granted final approval of Cobalt’s ANDA. In March 2004, Cobalt stipulated to infringement of the ’722 patent. Subsequent to filing our original complaint, we amended our complaint to add an allegation of infringement of the ’856 patent. The ’856 patent covers one of Altace^®’s three indications for use. In response to the amended complaint, Cobalt informed the FDA that it no longer seeks approval to market its proposed product for the indication covered by the ’856 patent. On this basis, the court granted Cobalt summary judgment of non-infringement of the ’856 patent. The court’s decision does not affect Cobalt’s infringement of the ’722 patent. On February 27, 2006, the Company, Aventis and Cobalt agreed that, subject to certain conditions, within 38 days, all parties will submit a joint stipulation dismissing without prejudice the litigation before the U.S. District Court of Massachusetts.

Eon Labs, Inc. (“Eon Labs”), CorePharma, LLC (“CorePharma”) and Mutual Pharmaceutical Company (“Mutual”) have each filed an ANDA with the FDA seeking permission to market a generic version of Skelaxin^® 400 mg tablets. Additionally, Eon Labs’ ANDA seeks permission to market a generic version of Skelaxin^® 800 mg tablets. United States Patent Nos. 6,407,128 (the “128 patent”), and 6,683,102 (the “102 patent”), two method-of-use patents relating to Skelaxin^®, are listed in the FDA’s Orange Book and do not expire until December 3, 2021. Eon Labs and CorePharma have each filed Paragraph IV certifications alleging noninfringement and invalidity of the ’128 and ’102 patents. Mutual has filed a Paragraph IV certification alleging noninfringement and invalidity of the ’102 patent. We filed a patent infringement suit against Eon Labs on January 2, 2003 in the District Court for the Eastern District

of New York, and against CorePharma on March 7, 2003 in the District Court for the District of New Jersey (subsequently transferred to the District Court for the Eastern District of New York), as well as against Mutual on March 12, 2004 in the District Court for the Eastern District of Pennsylvania concerning their proposed 400 mg products. Additionally, we filed a separate suit against Eon Labs on December 17, 2004 in the District Court for the Eastern District of New York, concerning its proposed 800 mg product. Pursuant to the Hatch-Waxman Act, our filing of the suit against CorePharma provided us with an automatic stay of FDA approval of CorePharma’s ANDA for 30 months from no earlier than January 24, 2003. Also pursuant to the Hatch-Waxman Act, the filing of the suits against Eon Labs provided us with an automatic stay of FDA approval of Eon Labs’ ANDA for its proposed 400 mg and 800 mg products for 30 months from no earlier than November 18, 2002 and November 3, 2004, respectively. We intend to vigorously enforce our rights under the ’128 and ’102 patents to the full extent of the law.

On March 9, 2004, we received a copy of a letter from the FDA to all ANDA applicants for Skelaxin^® stating that use listed in the FDA’s Orange Book for the ’128 patent may be deleted from the ANDA applicants’ product labeling. We believe that this decision is arbitrary, capricious, and inconsistent with the FDA’s previous position on this issue. We filed a Citizen Petition on March 18, 2004 (supplemented on April 15, 2004 and on July 21, 2004), requesting the FDA to rescind that letter, to require generic applicants to submit Paragraph IV certifications for the ’128 patent, and to prohibit the removal of information corresponding to the use listed in the FDA’s Orange Book. We concurrently filed a Petition for Stay of Action requesting the FDA to stay approval of any generic metaxalone products until the FDA has fully evaluated our Citizen Petition.

On March 12, 2004, the FDA sent a letter to us explaining that our proposed labeling revision, which includes references to additional clinical studies relating to food, age, and gender effects, was approvable and only required certain formatting changes. On April 5, 2004, we submitted amended labeling text that incorporated those changes. On April 5, 2004, Mutual filed a Petition for Stay of Action requesting the FDA to stay approval of our proposed labeling revision until the FDA has fully evaluated and ruled upon our Citizen Petition, as well as upon all comments submitted in response to that petition. Discussions with the FDA concerning appropriate labeling are ongoing. CorePharma, Mutual and we have filed responses and supplements to our pending Citizen Petition.

If our Citizen Petition is rejected, there is a substantial likelihood that a generic version of Skelaxin^® will enter the market and our business, financial condition, results of operations and cash flows could be materially adversely affected. As of December 31, 2005, we had net intangible assets related to Skelaxin^® of $170.4 million. We have entered into an agreement with a generic pharmaceutical company to launch an authorized generic of Skelaxin^® in the event we face generic competition for Skelaxin^®. However, we cannot assure to what extent this strategy will be successful.

Teva Pharmaceuticals USA, Inc. (“Teva”) filed an ANDA with the FDA seeking permission to market a generic version of Sonata^® in 5 mg and 10 mg dosages. In addition to its ANDA, Teva filed a Paragraph IV certification challenging the enforceability of U.S. Patent 4,626,538 (the “538 patent”) listed in the FDA’s Orange Book which expires in June 2008. We filed suit against Teva in the United States District Court for the District of New Jersey to enforce our rights under the ’538 patent. Pursuant to the Hatch-Waxman Act, our filing of that suit provides us an automatic stay of FDA approval of Teva’s ANDA for 30 months from no earlier than June 21, 2005. We intend to vigorously enforce our rights under the ’538 patent. If a generic form of Sonata^® enters the market, our business, financial condition, results of operations and cash flows could be materially adversely affected. As of December 31, 2005, we had net intangible assets related to Sonata^® of $12.9 million.

Sicor Pharmaceuticals, Inc. (“Sicor”), a generic drug manufacturer located in Irvine California, filed an ANDA with the FDA seeking permission to market a generic version of Adenoscan^®. U.S. Patent No. 5,070,877 (the “ ’877 patent”) is assigned to us and is listed in the FDA’s Orange Book entry for Adenoscan^®. Astellas Pharma US, Inc. (“Astellas”) is our exclusive licensee of certain rights under the ’877 patent and has marketed Adenoscan^® in the U.S. since 1995. Sicor Pharma has filed a Paragraph IV certification alleging invalidity of the ’877 patent and non-infringement of certain claims of the ’877 patent. We and Astellas filed suit against Sicor and its parents/affiliates Sicor, Inc., Teva and Teva Pharmaceutical Industries, Ltd., on May 26, 2005, in the United States District Court for the District of Delaware to enforce our rights under the ’877 patent. Pursuant to the Hatch-Waxman Act, the filing of that suit provides us with an automatic stay of FDA approval of Sicor’s ANDA for 30 months from no earlier than April 16, 2005. We intend to vigorously enforce our rights under the ’877 patent. If a generic version of Adenoscan^® enters the market, our business, financial condition, results of operations and cash flows could be materially adversely affected.

In 2003, Barr Laboratories, Inc. (“Barr”) filed an ANDA with the FDA seeking permission to market a generic version of Prefest^®. On October 15, 2003, we received notice of Barr’s Paragraph IV certification, which alleged noninfringement and invalidity of two patents, the ’995 patent and the ’573 patent. On November 26, 2003, we filed a complaint against Barr in the Southern District of New York for infringement of the ’995 and ’573 patents. On November 22, 2004, we sold all of our rights in Prefest^® for approximately $15.0 million. As a result of this transaction, the lawsuit was dismissed on January 11, 2005.

In these cases, the plaintiffs attempted to link the receipt of the mercury-based products to neurological defects. The plaintiffs claim unfair business practices, fraudulent misrepresentations, negligent misrepresentations, and breach of implied warranty, which are all arguments premised on the idea that the defendants promoted products without any reference to the toxic hazards and potential public health ramifications resulting from the mercury-containing preservative. The plaintiffs also allege that the defendants knew of the dangerous propensities of thimerosal in their products.

Our product liability insurance carrier has been given proper notice of all of these matters and defense counsel is vigorously defending our interests. We have filed motions to dismiss due, among other things, to lack of product identity in the plaintiffs’ complaints. In 2001, our motion to dismiss was granted in a similar case on this basis. We intend to defend these lawsuits vigorously but are unable currently to predict the outcome or to reasonably estimate the range of potential loss, if any.

We have been named as a defendant in seventeen lawsuits involving the manufacture and sale of hormone replacement therapy drugs. Numerous pharmaceutical companies have also been sued. These cases have been filed in Alabama, Arkansas, Missouri, Pennsylvania, Ohio, Minnesota, Florida, Maryland and Mississippi. The plaintiffs allege that we and other defendants failed to conduct adequate pre-approval research and post-approval surveillance to establish the safety of the long-term hormone therapy regimen, thus misleading consumers when marketing their products. Plaintiffs’ claims include allegations of negligence, strict liability, breach of implied warranty, breach of express warranty, fraud and misrepresentation. We intend to defend these lawsuits vigorously but are unable currently to predict the outcome or to reasonably estimate the range of potential loss, if any.

In August 2004, we and Monarch Pharmaceuticals, Inc. (“Monarch”), a wholly owned subsidiary of ours, were named as defendants along with 44 other pharmaceutical manufacturers in an action brought by the City of New York (“NYC”) in federal court in the state of New York. NYC claims that the defendants fraudulently inflated their Average Wholesale Prices and fraudulently failed to accurately report their “Best Prices” and their Average Manufacturer’s Prices and failed to pay proper rebates pursuant to federal law. Additional claims allege violations of federal and New York statutes, fraud and unjust enrichment. For the period from 1992 to the present, NYC is requesting money damages, civil penalties, declaratory and injunctive relief, restitution, disgorgement of profits, and treble and punitive damages.

In August 2004, a defendant in the NYC action sought to have the action transferred to the United States District Court for the District of Massachusetts and combined with existing multi-district litigation, entitled “In re Pharmaceutical Industry Average Wholesale Pricing Litigation,” being heard by that court. A conditional transfer order was issued during September 2004 indicating that the action is subject to transfer for pretrial proceedings to the United States District Court for the District of Massachusetts. We intend to defend this lawsuit vigorously but are unable currently to predict the outcome or reasonably estimate the range of loss, if any.

We also have been named as a defendant along with other pharmaceutical manufacturers in thirty-four other lawsuits containing allegations of fraudulently inflating average wholesale prices. These lawsuits have been filed in federal courts in New York and Massachusetts, and in state courts in New York, Mississippi, and Alabama, some of which we are seeking to have transferred to the United States District Court for the District of Massachusetts and combined with the existing multi-district litigation.

Many distributors, marketers and manufacturers of anorexigenic drugs have been subject to claims relating to the use of these drugs. Generally, the lawsuits allege that the defendants (1) misled users of the products with respect to the dangers associated with them, (2) failed to adequately test the products and (3) knew or should have known about the negative effects of the drugs, and should have informed the public about the risks of such negative effects. The actions generally have been brought by individuals in their own right and have been filed in various state and federal jurisdictions throughout the United States. They seek, among other things, compensatory and punitive damages and/or court-supervised medical monitoring of persons who have ingested the product. We are one of many defendants in no more than six lawsuits that claim damages for personal injury arising from our production of the anorexigenic drug phentermine under contract for GlaxoSmithKline.

While we cannot predict the outcome of these suits, we believe that the claims against us are without merit and we intend to vigorously pursue all defenses available to us. We are being indemnified in all of these suits by GlaxoSmithKline, for which we manufactured the anorexigenic product, provided that neither the lawsuits nor the associated liabilities are based upon our independent negligence or intentional acts. We intend to submit a claim for all unreimbursed costs to our product liability insurance carrier. However, in the event that GlaxoSmithKline is unable to satisfy or fulfill its obligations under the indemnity, we would have to defend the lawsuits and be responsible for damages, if any, that are awarded against it or for amounts in excess of our product liability coverage. A reasonable estimate of possible losses related to these suits cannot be made.

In addition, King Research and Development is a defendant in approximately 143 multi-defendant lawsuits involving the manufacture and sale of dexfenfluramine, fenfluramine and phentermine. These suits have been filed in various jurisdictions throughout the United States and in each of these suits King Research and Development, as the successor to Jones, is one of many defendants, including manufacturers and other distributors of these drugs. Although Jones did not at any time manufacture dexfenfluramine, fenfluramine, or phentermine, Jones was a distributor of a generic phentermine product and, after its acquisition of Abana Pharmaceuticals, was a distributor of Obenix^®, Abana’s branded phentermine product. The plaintiffs in these cases claim injury as a result of ingesting a combination of these weight-

King Research and Development denies any liability incident to the distribution of Obenix^® or Jones’ generic phentermine product and intends to pursue all defenses available to it. King Research and Development’s insurance carriers are currently defending King Research and Development in these suits. The manufacturers of fenfluramine and dexfenfluramine have settled many of these cases. In the event that King Research and Development’s insurance coverage is inadequate to satisfy any resulting liability, King Research and Development will have to resume defense of these lawsuits and be responsible for the damages, if any, that are awarded against it.

While we cannot predict the outcome of these suits, management believes that the claims against King Research and Development are without merit and intends to vigorously pursue all defenses available. We are unable to disclose an aggregate dollar amount of damages claimed because many of these complaints are multi-party suits and do not state specific damage amounts. Rather, these claims typically state damages as may be determined by the court or similar language and state no specific amount of damages against King Research and Development. Consequently, we cannot reasonably estimate possible losses related to the lawsuits.

The Rochester facility was one of six facilities owned by Pfizer subject to a Consent Decree of Permanent Injunction issued August 1993 in United States of America v. Warner-Lambert Company and Melvin R. Goodes and Lodewijk J.R. DeVink (U.S. Dist. Ct., Dist. of N.J.) (the “Consent Decree”). We acquired the Rochester facility in February 1998. In July 2005, the Court lifted the Consent Decree and the Rochester facility is no longer subject to the Consent Decree.

The following discussion should be read in conjunction with the other parts of this report, including the audited consolidated financial statements and related notes. Historical results and percentage relationships set forth in the statement of income, including trends that might appear, are not necessarily indicative of future operations. Please see the “Risk Factors” and “Forward-Looking Statements” sections for a discussion of the uncertainties, risks and assumptions associated with these statements.

We are a vertically integrated pharmaceutical company that develops, manufactures, markets and sells branded prescription pharmaceutical products. We seek to capitalize on opportunities in the pharmaceutical industry through the development, including through in-licensing arrangements and acquisitions, of novel branded prescription pharmaceutical products in attractive markets and the strategic acquisition of branded products that can benefit from focused promotion and marketing and product life-cycle management.

Our strategy also focuses on growth through the acquisition of novel branded pharmaceutical products in later stages of development and technologies that have significant market potential that complement our three key therapeutic areas of focus. Utilizing our internal resources and a disciplined business development process, we strive to be a leader and partner of choice in bringing innovative, clinically-differentiated therapies and technologies to market in our key therapeutic areas. We may also seek company acquisitions which add products or products in development, technologies or sales and marketing capabilities to our key therapeutic areas or that otherwise complement our operations.

Our Meridian Medical Technologies segment consists of our auto-injector business, which includes EpiPen^® and nerve gas antidotes which we provide to the U.S. Military. Royalties relates to revenues we derive from successfully developed products that we have licensed to third parties. Our contract manufacturing segment manufactures pharmaceutical products for third parties under contracts with a number of pharmaceutical and biotechnology companies.

During late 2003, we became aware of the need to improve our visibility with respect to wholesale inventory levels of our branded pharmaceutical products. As a result, in April 2004 we successfully entered into inventory management agreements (“IMAs”) with each of our three key wholesale customers covering all of our branded products for the purpose of obtaining data regarding and reducing the level of wholesale inventories of our products. As we anticipated, entering into the IMAs adversely affected net sales of some of our branded pharmaceutical products, particularly during 2004, as wholesale inventory levels of these products were aggressively reduced.

Wholesale inventory data provided by our customers indicates that wholesale inventory levels of our key branded products, Altace^®, Skelaxin^®, Thrombin-JMI^®, Sonata^® and Levoxyl^®, were each at one month or less of estimated end-user demand as of December 31, 2005. The data on which we based our original third quarter estimate of wholesale inventory levels was incorrect primarily due to reporting errors by some of our customers. Accordingly, we now believe that the wholesale inventory levels of Altace^® and

On October 31, 2005, we entered into definitive settlement agreements with the United States of America and with 48 states and the District of Columbia to resolve the governmental investigations related to the underpayment of rebates owed to Medicaid and other governmental pricing programs during the period from 1994 to 2002. We have agreed to a settlement with the remaining state on substantially the same terms as the other state settlements, and we expect to enter into a definitive settlement agreement with that state before the end of the first quarter of 2006. On March 2, 2006, we paid approximately $126.9 million, comprising the settlement amount and accrued interest under our settlement agreements with the United States and the 48 states and the District of Columbia. We have further agreed to pay approximately $0.4 million to the remaining state and, subject to certain conditions, certain legal fees and settlement costs in the amount of approximately $1.8 million. We currently expect to pay these additional amounts by the end of the first quarter of 2006. In addition, we have entered into a five-year corporate integrity agreement with the Office of Inspector General of the Department of Health and Human Services pursuant to which we are required, among other things, to keep in place our current compliance program, to provide periodic reports and to submit to audits relating to our Medicaid rebate calculations.

Consummation of the federal settlement agreement and some state settlement agreements is or was subject to court approval. On February 24, 2006, the United States District Court for the Eastern District of Pennsylvania (“District Court”) approved the federal settlement agreement. All interested parties, including us, the individual purportedly acting as a “relator” under the False Claims Act and the affected states, have requested that the District Court approve the state settlement agreements that require court approval.

The settlement agreements described above will not resolve any of the previously disclosed civil suits that are pending against us and related individuals and entities discussed under the heading “Securities and ERISA Litigation” in the section below entitled “Liquidity and Capital Resources.” Also, the SEC investigation of our previously disclosed errors relating to reserves for product returns is continuing. For additional information and a discussion regarding the governmental investigations, please see “Settlement of Governmental Pricing Investigation” and “SEC Investigation” in the section below entitled “Liquidity and Capital Resources.”

We continued to enhance our executive management team in 2005 with several notable additions, including Joseph Squicciarino, our new Chief Financial Officer, who has over twenty years of financial experience in the pharmaceutical industry. Another important addition is Eric J. Bruce, our new Chief Technical Operations Officer, who assumes responsibility for our manufacturing, logistics, distribution and quality organizations. Mr. Bruce has over 25 years of manufacturing experience.

On November 10, 2005, we entered into a strategic alliance with Pain Therapeutics, Inc. to develop and commercialize Remoxy^tm and potentially up to three other abuse-resistant opioid painkillers. Remoxy^tm is an investigational drug in late-stage clinical development by Pain Therapeutics for the treatment of moderate-to-severe-chronic pain and represents the first of what is expected to be an entirely new class of proprietary drugs, abuse-resistant opioid painkillers.

$150.0 million in cash based on the successful clinical and regulatory development of Remoxy^tm and other abuse-resistant opioid products. This amount includes a $15.0 million cash payment upon acceptance of a regulatory filing for Remoxy^tm and an additional $15.0 million upon its approval. We are responsible for all research and development expenses related to this alliance, which could total $100.0 million. We are also responsible for the payment of third-party royalty obligations of Pain Therapeutics related to products developed under this collaboration.

Remoxy^tm, which is currently in Phase III clinical trials, is being developed as an abuse-resistant version of long-acting oxycodone, which is also known as Oxycontin^®. The Remoxy^tm formulation consists of a sticky, high-viscosity mass that is not prone to injection or snorting. It is intended to meet the needs of physicians who appropriately prescribe opioid painkillers and who seek to minimize risks of drug diversion, abuse or accidental patient misuse. Published data show that freezing, crushing, or submerging Remoxy^tm in high-proof alcohol for hours at a time releases just a fraction of oxycodone compared to currently available formulations of oxycodone at time points when abusers presumably expect to be able to abuse its active ingredient.

With the addition of Remoxy^tm, our current research and development pipeline includes three products in Phase III and two products in late Phase II. In addition to Remoxy^tm, our Phase III products include binodenoson, a pharmacologic cardiac stress imaging agent intended to provide a reduced side effects profile compared to the currently approved product Adenoscan^®. Also in Phase III is Vanquix^tm, our diazepam-filled auto-injector that is currently under development as the only therapy of its kind for the treatment of acute, repetitive epileptic seizures.

Our Phase II compounds are led by PT-141, under our collaborative agreement with Palatin Technologies. PT-141 is the first compound in a new drug class called melanocortin receptor agonists under development to treat sexual dysfunction in both men and women. Data obtained in trials, completed to date, indicates that PT-141 is effective in male erectile dysfunction (“ED”) and provides additive benefit to PDE-5 inhibitors. This new chemical entity is being evaluated in Phase II clinical trials studying the efficacy and safety profile of varying doses of this novel compound in men experiencing ED and women experiencing female sexual dysfunction.

On December 6, 2005, we entered into a cross-license agreement with Mutual Pharmaceutical Company, Inc. Under the terms of the agreement, each of the parties granted the other a worldwide license to certain intellectual property, including patent rights and know-how, relating to metaxalone. The intellectual property licensed to us relates to the potential for improved dosing and administration of metaxalone. Pursuant to the agreement, we paid Mutual an upfront payment of $35.0 million and will pay Mutual royalties on net sales of products containing metaxalone beginning on January 1, 2006. Our current formulation of metaxalone is Skelaxin^®. The royalty rate may increase depending on the achievement of certain regulatory and commercial milestones of metaxalone products.

On September 8, 2005, we entered into a strategic collaboration with Inyx, Inc. relating to Intal^® and Tilade^®, which includes the continued development of a new formulation of Intal^® utilizing hydrofluoroalkane (“HFA”), an environmentally friendly propellant. These products are our currently marketed inhaled anti-inflammatory agents for the management of asthma. Pursuant to the agreements, we and Inyx will co-market Intal^® and Tilade^® and each have a share of net revenues. We will continue to market to hospitals and primary-care physicians, while Inyx will pursue direct sales to the specialist markets. Inyx also plans to supervise the distribution of Intal^® HFA in Canada.

our products. While our calculation for returns reserves is based on historical sales and return rates over the period which customers have a right of return, we also consider the amount of wholesale inventory levels. The significant reduction in wholesale inventories of our products during the first quarter of 2005 resulted in a decrease of approximately $20.0 million in our reserve for returns and a corresponding increase in net sales from branded pharmaceuticals, excluding the adjustment to sales classified as discontinued operations. In the second quarter of 2005, an additional reduction in wholesale inventories resulted in a decrease of approximately $5.0 million in our reserve for returns and a corresponding increase in net sales from branded pharmaceuticals, excluding the adjustment to sales classified as discontinued operations. The 2005 “current provision” amounts in the table “Accrual for Returns,” above, have therefore been reduced by these amounts.

During the third quarter of 2005, our actual returns of branded pharmaceutical products continued to decrease significantly on a quarterly basis compared to actual returns during the quarterly periods in 2004 and the first quarter of 2005. Additionally, based on data received pursuant to our inventory management agreements with our key wholesale customers, we continued to experience normalized wholesale inventory levels of our branded pharmaceutical products during the third quarter of 2005. Accordingly, we believe that the rate of returns experienced during the second and third quarters of 2005 is more indicative of what we should expect in future quarters and have adjusted our returns reserve accordingly. This change in estimate resulted in a decrease of approximately $15.0 million in the returns reserve in the third quarter and a corresponding increase in net sales from branded pharmaceutical products, excluding the adjustment to sales classified as discontinued operations. The 2005 “current provision” amount in the “Accrual for Returns” above, has therefore been reduced by this amount. As a result of this increase in net sales, the co-promotion expense related to net sales of Altace^® in the third quarter of 2005 increased by approximately $5.0 million. The effect of the change in estimate on third quarter 2005 operating income was, therefore, approximately $10.0 million.

As a result of our previously disclosed determination that we underpaid amounts due to Medicaid and other government pricing programs from 1998 through 2002, we developed a refined calculation to compute the Average Manufacturer’s Price (“AMP”) and Best Price in compliance with federal laws and regulations. For a discussion regarding the underpayment to Medicaid and other government pricing programs from 1998 through 2002, please see “Settlement of Governmental Pricing Investigation” in Item 3, “Legal Proceedings.” During the third quarter of 2005, we began reporting to the Centers for Medicare and Medicaid Services using our refined calculation for computing AMP and Best Price. In addition, during the third quarter of 2005, we recalculated rebates due with respect to prior quarters utilizing the refined AMP and Best Price calculations. As a result of this updated information, during the third quarter of 2005, we decreased our reserve for estimated Medicaid and other government pricing program obligations and increased net sales from branded pharmaceutical products by approximately $21.0 million, approximately $8.0 million of which related to years prior to 2005. This does not include the adjustment to sales classified as discontinued operations. As a result of the increase in net sales, the co-promotion expense related to net sales of Altace^® increased by approximately $6.0 million, approximately $4.0 million of which related to years prior to 2005. The effect of the change in estimate on operating income was, therefore, approximately $15.0 million, approximately $4.0 million of which related to years prior to 2005.

Net sales from branded pharmaceutical products were higher in 2005 than in 2004 primarily due to the effect of higher unit sales and a lower rate of reserve for returns of some of these products in 2005 as a result of the effect of a higher level of wholesale inventory reductions of some of our branded pharmaceutical products during 2004, the effect of a reduction in reserves for returns and rebates and price increases, particularly with respect to Thrombin-JMI^®. For discussions regarding the effects of wholesale inventory reductions, please see the information under the heading “Wholesale Inventory Reductions” above. Based on inventory data provided to us by our key customers, we believe that wholesale inventory levels of our key products, Altace^®, Skelaxin^®, Thrombin-JMI^®, Levoxyl^®, and Sonata^®, as of December 31, 2005, are at normalized levels of less than one month of end-user demand for these products. We do not believe net sales of branded pharmaceutical products will continue to grow at the rate experienced in 2005, due to the factors effecting sales growth described above. For a discussion regarding the potential risk of generic competition for Altace^®, Skelaxin^®, and Sonata^®, please see “Altace^® Patent Challenge,” “Skelaxin^® Patent Challenge,” and “Sonata^® Patent Challenge,” in Item 3, “Legal Proceedings.”

Net sales of Altace^® were higher in 2005 than in 2004 primarily due to higher unit sales and a lower rate of reserve for returns of the product in 2005 as a result of the effects of a higher level of wholesale inventory reductions of Altace^® in 2004, a reduction in the reserves for returns and rebates of Altace^® in 2005, and price increases. We do not believe Altace^® net sales will continue to grow at the rate experienced in 2005, due to the factors effecting sales growth described above. Total prescriptions for Altace^® increased approximately 1% in 2005 from 2004 according to IMS America, Ltd. (“IMS”) monthly prescription data. During the last half of 2005, prescriptions for Altace^® were flat to declining. We anticipate this trend to continue in 2006. For a discussion regarding the risk of potential generic competition for Altace^®, please see “Altace^® Patent Challenge,” in Item 3, “Legal Proceedings.”

Net sales of Skelaxin^® increased in 2005 from 2004 primarily due to higher unit sales as a result of the effects of a higher level of wholesale inventory reductions of Skelaxin^® in 2004. Net sales of Skelaxin^® in 2005 also benefited from a reduction in reserves for returns and rebates of Skelaxin^® and modest price increases. We do not believe Skelaxin^® net sales will continue to grow at the rate experienced in 2005, due to the factors effecting net sales growth described above. For discussions regarding the effects of wholesale inventory reductions, please see under the headings “Wholesale Inventory Reductions” above. Total prescriptions for Skelaxin declined approximately 10% in 2005 from 2004 according to IMS monthly prescription data. The declining prescriptions trend may not continue in 2006 due to reinvigorated promotion of the product.

Net sales of Sonata^® were higher in 2005 than in 2004 primarily due to higher unit sales as a result of the effects of a higher level of wholesale inventory reductions of Sonata^® in 2004. Net sales of Sonata^® in 2005 also benefited from modest price increases. For discussions regarding the effects of wholesale inventory reductions, please see under the headings “Wholesale Inventory Reductions” above. Total prescriptions for Sonata^® decreased approximately 12% in 2005 from 2004 according to IMS monthly prescription data. The decrease in prescriptions during 2005 was primarily due to increased competition during 2005. We believe net sales of the product in 2006 will decrease as other potential competitive insomnia products may enter the market during 2006. For a discussion regarding the risk of potential generic competition for Sonata^®, please see “Sonata^® Patent Challenge” in Item 3, “Legal Proceedings.”

Net sales of Levoxyl^® were higher in 2005 than in 2004, notwithstanding lower unit sales due to generic competition, primarily due to a lower rate of actual returns of the products and a reduction in the amount of commercial rebates. Total prescriptions for Levoxyl^® decreased approximately 33% in 2005 from 2004 according to IMS monthly prescription data. Due to the continued erosion in total prescriptions for Levoxyl^® as a result of the entry of generic competition for the product in 2004, we believe that net sales of this product in 2006 should decrease significantly compared to 2005.

Net sales of other branded pharmaceutical products were higher in 2005 than in 2004 primarily due to the effects of a higher level of wholesale inventory reductions of other branded pharmaceutical products in 2004. Net sales of other branded pharmaceutical products in 2005 benefited from a reduction in reserves for returns and rebates for these products and modest price increases. Most of these products are not promoted through our sales force and prescriptions on many of these products are declining. We do not believe net sales of other branded pharmaceutical products will continue to grow at the rate experienced in 2005, due to the factors effecting sales growth described above.

Cost of revenues from branded pharmaceutical products was lower in 2004 compared to 2003 primarily due to a reduction in the amount of special items affecting cost of revenues and lower unit sales of our branded pharmaceutical products as a result of the wholesale inventory reductions discussed above. For additional information and a description of the effect of wholesale channel inventory on net sales, please see the section above entitled “Wholesale Inventory Reductions.”

Special items are those particular material income or expense items that our management believes are not related to our ongoing, underlying business, are not recurring, or are not generally predictable. These items include, but are not limited to, merger and restructuring expenses; non-capitalized expenses associated with acquisitions, such as in-process research and development charges and one-time inventory valuation adjustment charges; charges resulting from the early extinguishments of debt; asset impairment charges; expenses of drug recalls; and gains and losses resulting from the divestiture of assets. We believe the identification of special items enhances an analysis of our ongoing, underlying business and an analysis of our financial results when comparing those results to that of a previous or subsequent like period.

Total selling, general and administrative expenses increased in 2005 compared to 2004 primarily due to an increase in co-promotion fees we paid to Wyeth under our Co-Promotion Agreement as a result of higher net sales of Altace^® during 2005 as compared to 2004, which were partially offset by a lower net charge for special items affecting this category of expense in 2005 compared to 2004. For a discussion regarding the increase in net sales of Altace^®, please see “Altace^®” within the “Sales of Key Products” section above.

In 2004, total selling, general and administrative expenses increased from 2003 primarily due to operating expenses associated with the expansion of our sales and marketing organization, increased expenses associated with special items, and increased marketing expenses associated with marketing campaigns for some of our products, which together were substantially offset by decreases in co-promotion fees we paid to Wyeth under our Co-Promotion Agreement as a result of lower sales of Altace^® during 2004, as compared to 2003.

As a percentage of total revenues, total selling, general, and administrative expenses decreased to 35.9% in 2005 compared to 45.6% in 2004. Selling, general and administrative expense, as a percentage of total revenues, was higher in 2004 than in 2005 primarily due to lower total revenues in 2004 as a result of a higher level of wholesale channel inventory reductions of some of our branded pharmaceutical products and a higher level of expense associated with special items affecting this category of expense in 2004 compared to 2005 as discussed above.

Research and development represents expenses associated with the ongoing development of investigational drugs and product life-cycle management projects in our research and development pipeline. These expenses have continued to increase over time as our development programs have progressed to later stages of clinical development, which later stages are much more expensive than earlier stages, and as we have continued to add late-stage products in development to our portfolio. Our business model continues to focus on adding to our research and development pipeline through the acquisition of novel branded pharmaceutical products and technologies in later stages of development. Accordingly, we anticipate that this category of expense will continue to increase in 2006.


		decline in prescriptions for Florinef^® and Tapazole^® due to availability of generics for these products. An intangible asset impairment charge of $124.6 million in 2003 primarily reflecting the reduction in the fair value of the Florinef^® intangible assets upon the FDA’s approval of a second generic on January 21, 2003. The additional intangible asset impairment charge pertaining to Florinef^® recorded in 2004 reflects a further reduction in the fair value of the intangible assets associated with this product due to a decline in prescriptions that exceeded our original estimate. These special items were recorded in order to adjust the carrying value of the intangible assets on our balance sheet associated with these products so as to reflect the estimated fair value of these assets at the relevant time.

	•	Restructuring charges in the amount of $2.3 million in 2005 due to a decision to reduce our workforce in order to improve efficiencies in our operations. Restructuring charges in the amount of $1.9 million and $10.8 million in 2005 and 2004, respectively, primarily as a result of separation agreements with several of our executives, the relocation of our sales and marketing operations from Bristol, Tennessee to Princeton, New Jersey and our decision to discontinue some relatively insignificant products associated with Meridian Medical Technologies’ business.

	•	Income of $1.7 million and $9.5 million in 2005 and 2004, respectively, primarily due to a gain on our divestiture of our Anusol-HC^® and Proctocort^® product lines and a gain on the termination of our co-promotion and license agreements with Novavax Inc. regarding Estrasorb^tm and the repurchase by Novavax of all of its convertible notes which we held.

	•	During 2003, we had income of $12.0 million due to a gain on the sale of our animal health products and certain non-income producing intangible assets.

Demand for some of our non-key products, including but not limited to Intal^®, Tilade^® and Synercid^®, declined over the past year at a rate which triggered a review of the intangible assets associated with these products. As of December 31, 2005, the net intangible assets associated with these three products totaled approximately $196.7 million. We believe that these intangible assets are not currently impaired based on estimated undiscounted cash flows associated with these assets. However, if demand for the products associated with these intangible assets declines below current expectations, we may have to reduce the estimated remaining useful life and/or write off a portion or all of these intangible assets.

In addition, certain generic companies have challenged patents on Altace^®, Skelaxin^®, and Sonata^®. For additional information, please see the sections entitled “Altace^® Patent Challenge”, “Skelaxin^® Patent Challenge”, and “Sonata Patent Challenge” in Item 3 “Legal Proceedings.” If a generic version of Altace^®, Skelaxin^® or Sonata^® enters the market, we may have to write-off a portion or all of the intangible assets associated with these products.

Our Rochester, Michigan facility manufactures products for us and various third-parties. As of December 31, 2005, the net carrying value of the property, plant and equipment at the Rochester facility, excluding that associated with the production of Bicillin^®, was $66.0 million. Overall production volume at this facility has been declining. We are currently transferring to this facility the manufacture of certain products that are currently manufactured by us at other facilities or for us by third parties. These transfers should increase production and cash flow at the Rochester facility. We currently believe that the long-term assets associated with the Rochester facility are not impaired based on estimated undiscounted future cash flows. However, if production volumes continue to decline or if we are not successful in transferring additional production to the Rochester facility, we may have to write-off a portion of the property, plant, equipment associated with this facility.

During the first quarter of 2004, our Board of Directors approved management’s decision to market for divestiture some of our women’s health products, including Prefest^® and Nordette^®, which we sold in the fourth quarter of 2004. These product rights had identifiable cash flows that were largely independent of the cash flows of other groups of assets and liabilities and are classified as discontinued operations. Accordingly, all net sales, cost of revenues, selling, general and administrative costs, amortization and other operating costs associated with Prefest^® and Nordette^® are included in discontinued operations in 2005, 2004 and 2003.

We have a supply agreement with a third party to produce ramipril, the active ingredient in Altace^®. This supply agreement is reflected in the unconditional purchase obligations above. This supply agreement requires us to purchase certain minimum levels of ramipril as long as we maintain market exclusivity on Altace^® in the United States, and thereafter the parties must negotiate in good faith the annual minimum purchase quantities. If sales of Altace^® do not increase, if we are unable to maintain market exclusivity for Altace^® in accordance with our current expectations, if our product life cycle management is not successful, or if the supply agreement or the annual minimum purchase commitments do not terminate at an optimal time for us, we may incur losses in connection with the purchase commitments under the supply agreement. In the event we incur losses in connection with the purchase commitments under the supply agreement, there may be a material adverse effect upon our results of operations and cash flows.

We have commitments to purchase metaxalone, the active ingredient in Skelaxin^®, from two suppliers in the form of purchase orders. These outstanding purchase orders are reflected in the unconditional purchase obligations above. If sales of Skelaxin^® do not continue as currently anticipated, we may incur losses in connection with the purchase commitments. In the event we incur losses in connection with the purchase commitments under these purchase orders, there may be a material adverse effect upon our results of operations and cash flows.

We believe that existing balances of cash, cash equivalents, investments in debt securities and marketable securities, cash generated from operations, our existing revolving credit facility and funds potentially available to us under our universal shelf registration are sufficient to finance our current operations and working capital requirements on both a short term and long term basis. However, we cannot predict the amount or timing of our need for additional funds, and numerous circumstances, including a significant acquisition of a business or assets, new product development projects, expansion opportunities, or other factors, could require us to raise additional funds in the future. We cannot assure you that funds will be available to us when needed on favorable terms, or at all.

In March 2006, we acquired substantially all of the assets of Allerex Laboratory LTD for $25.0 million, less an adjustment in the purchase price resulting in an initial payment of $23.4 million, plus an earn-out based on sales of EpiPen^® in Canada. The primary asset purchased from Allerex was the exclusive right to market and sell EpiPen^® throughout Canada. We further negotiated with Dey, L.P., an extension of those exclusive rights to market and sell EpiPen^® in Canada through 2015.

In February 2006, we entered into a collaboration with Arrow International Limited and certain of its affiliates (collectively, “Arrow”) to commercialize novel formulations of ramipril, the active ingredient in our Altace^® product. Under a series of agreements, Arrow has granted us rights to certain current and future New Drug Applications (“NDAs”) regarding novel formulations of ramipril and intellectual property, including patent rights and technology licenses relating to these novel formulations. Under certain conditions, Arrow will be responsible for the manufacture and supply of new formulations of ramipril for us. Additionally, we have granted Cobalt Pharmaceuticals, Inc. a non-exclusive right to enter into the U.S. ramipril market with a generic form of the currently marketed Altace^® product, which would be supplied by us. Cobalt is an affiliate of Arrow, but is not a party to the collaboration.

In December 2005, we entered into a cross-license agreement with Mutual Pharmaceutical Company, Inc. (“Mutual”). Under the terms of the agreement, each of the parties has granted the other a worldwide license to certain intellectual property, including patent rights and know-how, relating to metaxalone. We will pay royalties on net sales of products containing metaxalone beginning January 1, 2006. This royalty may increase depending on the achievement of certain regulatory and commercial milestones. The royalty we pay to Mutual is in addition to the royalty we pay to Elan on our current formulation of metaxalone, which we refer to as “Skelaxin^®” which is a part of our branded pharmaceutical segment.

During the fourth quarter of 2005, the Company entered into a strategic alliance with Pain Therapeutics to develop and commercialize Remoxy^tm and other abuse-resistant opioid painkillers. Remoxy^tm is an investigational drug in late-stage clinical development by Pain Therapeutics for the treatment of moderate-to-severe chronic pain. Under the strategic alliance, we may pay additional milestone payments of up to $150.0 million in cash based on the successful clinical and regulatory development of Remoxy^tm and other abuse-resistant opioid products. This includes a $15.0 million cash payment upon acceptance of a regulatory filing for Remoxy^tm and an additional $15.0 million upon its approval. We are responsible for all research and development expenses related to this alliance, which could total $100.0 million over four years. After regulatory approval and commercialization of Remoxy^tm or other products developed through this alliance, we will pay a royalty of 15% of the cumulative net sales up to $1.0 billion and 20% of the cumulative net sales over $1.0 billion.

In August 2004, we entered into a collaborative agreement with Palatin to jointly develop and, on obtaining necessary regulatory approvals, commercialize Palatin’s PT-141 for the treatment of male and female sexual dysfunction. In connection with this agreement, we agreed to pay potential milestone payments to Palatin of up to $100.0 million upon achieving certain development and regulatory approval targets, $10.0 million of which was paid during 2005. Following regulatory approval and commercialization of PT-141, we may also pay potential net sales milestone payments to Palatin of up to $130.0 million.

Elan was working to develop a modified release formulation of Sonata^®, which we refer to as Sonata^® MR, pursuant to an agreement we had with them which we refer to as the Sonata^® MR Development Agreement. In early 2005, we advised Elan that we considered the Sonata^® MR Development Agreement terminated. On August 26, 2005, Elan filed a request for mediation pursuant to the terms of the Sonata^® MR Development Agreement. We participated in mediation with Elan in early 2006, which did not result in an agreed resolution. The Sonata^® MR Development Agreement requires us to pay up to an additional $60.0 million if Elan achieves certain milestones in connection with the development of a reformulated version of Sonata^® and $15.0 million as a milestone payment if annual net sales of a reformulated version of

As additional consideration for Synercid^®, an injectable antibiotic acquired on December 30, 2002, we agreed to potential milestone payments. An additional $25.0 million milestone is payable to Sanofi-Aventis if Synercid^® should receive FDA approval to treat methicillin resistant staphylococcus aureus, or we will pay Sanofi-Aventis a one-time payment of $5.0 million the first time during any twelve-month period that net sales of Synercid^® exceed $60.0 million, and a one-time payment of $20.0 million the first time during any twelve-month period that net sales of Synercid^® exceed $75.0 million.

Pursuant to the Settlement Agreements, we agreed to pay a total of approximately $124.1 million (the “Settlement Amount”) and interest on the Settlement Amount at the rate of 3.75% from July 1, 2005 to the date of consummation of the settlement. We have further agreed to pay, subject to certain conditions, (i) legal fees relating to the settlement in the amount of approximately $0.8 million, and (ii) approximately $1.0 million in settlement costs. The Settlement Amount includes approximately $50.6 million of the Settlement Amount for payment to 49 states and the District of Columbia. The Settlement Amount includes approximately $63.7 million representing the amount of underpayments to Medicaid and other governmental pricing programs from 1994 to 2002 and approximately $60.4 million to cover interest, penalties and other costs. We currently expect to pay the Settlement Amount and the other amounts described above.

As previously reported, the SEC has also been conducting an investigation relating to our underpayments to governmental programs, as well as into our previously disclosed errors relating to reserves for product returns. While the SEC’s investigation is continuing with respect to the product returns issue, the Staff of the SEC has advised us that it has determined not to recommend enforcement action against us with respect to the aforementioned governmental pricing matter. The Staff of the SEC notified King of this determination pursuant to the final paragraph of Securities Act Release 5310. Although the SEC could still consider charges against individuals in connection with the governmental pricing matter, we do not believe that any governmental unit with authority to assert criminal charges is considering any charges of that kind.

Subsequent to the announcement of the SEC investigation described above, beginning in March 2003, 22 purported class action complaints were filed by holders of King’s securities against the Company, its directors, former directors, executive officers, former executive officers, King’s subsidiary, and a former director of the subsidiary in the United States District Court for the Eastern District of Tennessee, alleging violations of the Securities Act of 1933 and/or the Securities Exchange Act of 1934, in connection with our underpayment of rebates owed to Medicaid and other governmental pricing programs, and certain transactions between us and the Benevolent Fund. These 22 complaints have been consolidated in the United States District Court for the Eastern District of Tennessee. In addition, holders of King’s securities filed two class action complaints alleging violations of the Securities Act of 1933 in Tennessee state court. King removed these two cases to the United States District Court for the Eastern District of Tennessee, where these two cases were consolidated with the other class actions. Plaintiffs in these actions unsuccessfully moved to remand these two cases back to Tennessee state court. These two actions therefore remain part of the consolidated action. The district court has appointed lead plaintiffs in the consolidated action, and those lead plaintiffs filed a consolidated amended complaint on October 21, 2003 alleging that King, through some of its executive officers, former executive officers, directors, and former directors, made false or misleading statements concerning its business, financial condition, and results of operations during periods beginning February 16, 1999 and continuing until March 10, 2003. Plaintiffs in the consolidated action have also named the underwriters of King’s November 2001 public offering as

On August 12, 2004, the United States District Court for the Eastern District of Tennessee ruled on defendants’ motions to dismiss. The Court dismissed all claims as to Jones and as to defendants Dennis Jones and Henry Richards. The Court also dismissed certain claims as to five other individual defendants. The Court denied the motions to dismiss in all other respects. Following the Court’s ruling, on September 20, 2004, the Company and the other remaining defendants filed answers to plaintiffs’ consolidated amended complaint. Discovery in this action has commenced. The Court has set a trial date of April 10, 2007.

Additionally, a class action complaint was filed in the United States District Court for the Eastern District of Tennessee under the Employee Retirement Income Security Act (“ERISA”). As amended, the complaint alleges that King and certain of its executive officers, former executive officers, directors, former directors and an employee of King violated fiduciary duties that they allegedly owed King’s 401(k) Retirement Savings Plan’s participants and beneficiaries under ERISA. The allegations underlying this action are similar in many respects to those in the class action litigation described above. The defendants filed a motion to dismiss the ERISA action on March 5, 2004. The District Court Judge referred the motion to a Magistrate Judge for a report and recommendation. On December 8, 2004, the Magistrate Judge held a hearing on this motion, and, on December 10, 2004, he recommended that the District Court Judge dismiss the action. The District Court Judge accepted the recommendation and dismissed the case on February 4, 2005. The plaintiffs have not appealed this decision, and the deadline for filing any appeal has now passed.

or if any governmental sanctions are imposed in excess of those described above, neither of which we can predict or reasonably estimate at this time, our business, financial condition, results of operations and cash flows could be materially adversely affected. Responding to the government investigations and defending us in the pending litigation has resulted, and is expected to continue to result, in a significant diversion of management’s attention and resources and the payment of additional professional fees.

Certain generic companies have challenged patents on Altace^®, Skelaxin^®, Sonata^® and Adenoscan^®. For additional information, please see “Altace^® Patent Challenge”, “Skelaxin^® Patent Challenge”, “Sonata^® Patent Challenge,” and “Adenoscan^® Patent Challenge” in Item 3, “Legal Proceedings.” If a generic version of Altace^®, Skelaxin^®, Sonata^® or Adenoscan^® enters the market, our business, financial condition, results of operations and cash flows could be materially adversely affected.

Investing activities in 2005 were driven by payments totaling $198.7 million for our collaboration agreements with Pain Therapeutics and Palatin and our cross-license agreement with Mutual. Capital expenditures during 2005 totaled $53.3 million which included property, plant and equipment purchases, building improvements for facility upgrades and costs associated with improving our production capabilities, and costs associated with moving production of some of our pharmaceutical products to our facilities in St. Louis, Bristol and Rochester. Additionally in 2005, we transferred $73.6 million to restricted cash primarily related to the now completed investigation of our Company by the HHS/OIG. We increased our investments in debt securities by $345.2 million.

Investing activities in 2004 were driven by payments totaling $78.2 million for our collaboration agreement with Palatin and, milestone payments associated with the acquisitions of primary care business of Elan and Synercid^®. Capital expenditures during 2004 totaled $55.1 million which included property, plant and equipment purchases, building improvements for facility upgrades and costs associated with improving our production capabilities, and costs associated with moving production of some of our pharmaceutical products to our facilities in St. Louis, Bristol and Rochester. Additionally in 2004, we increased our investments in debt securities by $46.5 million which was partially offset by proceeds of $27.5 million principally from the sale of product rights.

Investing activities in 2003 were driven by acquisition costs totaling $1.0 billion for our purchase of Meridian and the primary care business of Elan. Capital expenditures during 2003 totaled $51.2 million which included property and equipment purchases, new information technology system implementation costs and building improvements for facility upgrades and increased capacity. Additionally in 2003, we transferred $67.7 million to restricted cash which was more than offset by proceeds of $668.7 primarily due to sales of investments in debt securities and marketable securities.

We anticipate capital expenditures, including capital lease obligations, for the year ending December 31, 2006 of approximately $50.0 million, which will be funded with cash from operations. The principal capital expenditures are anticipated to include property and equipment purchases, building improvements for facility upgrades, costs associated with improving our production capabilities, and costs associated with moving production of some of our pharmaceutical products to our facilities in St. Louis, Bristol and Rochester.

As of December 31, 2005, we had outstanding $345.0 million of 2³/4% Convertible Debentures due November 15, 2021. These debt securities were issued in a private placement in November 2001. Holders may require us to repurchase for cash all or part of these debentures on November 15, 2006, November 15, 2011, and November 15, 2016 at a price equal to 100% of the principal amount of the debentures plus accrued interest up to but not including the date of repurchase. As of December 31, 2005, we have classified the debentures as a current liability due to the right the holders have to require us to repurchase the debentures on November 15, 2006. Alternatively, we may elect to repurchase some or all of the debentures, by negotiation with debenture holders, a buy-back program, or a tender offer, prior to

We also had available as of December 31, 2005 up to $399.0 million under a five-year senior secured revolving credit facility that we established in April 2002. The facility is collateralized in general by all of our real estate with a value of $5.0 million or more and all of our personal property and that of our significant subsidiaries. Our obligations under the senior secured revolving credit facility are unconditionally guaranteed on a senior basis by most of our subsidiaries. The senior secured revolving credit facility accrues interest at our option, at either (a) the base rate, which is based on the greater of (1) the prime rate or (2) the federal funds rate plus one-half of 1%, plus an applicable spread ranging from 0.0% to 0.75% (based on a leverage ratio) or (b) the applicable LIBOR rate plus an applicable spread ranging from 1.0% to 1.75% (based on a leverage ratio). In addition, the lenders under the senior secured revolving credit facility are entitled to customary facility fees based on (a) unused commitments under the facility and (b) letters of credit outstanding. We incurred $5.1 million of deferred financing costs in connection with the establishment of this facility, which are being amortized over five years, the life of the senior secured revolving credit facility. This facility requires us to maintain a minimum net worth of no less than $1.2 billion plus 50% of our consolidated net income for each fiscal quarter after April 23, 2002, excluding any fiscal quarter for which consolidated income is negative; an EBITDA to interest expense ratio of no less than 3.00 to 1.00; and a funded debt to EBITDA ratio of no greater than 3.50 to 1.00 prior to April 24, 2004 and of no greater than 3.00 to 1.00 on or after April 24, 2004. As of December 31, 2005, we were in compliance with these covenants. As of December 31, 2005, we had $1.0 million outstanding for letters of credit under this facility.

On September 20, 2001, our universal shelf registration statement on Form S-3 was declared effective by the Securities and Exchange Commission. This universal shelf registration statement registered a total of $1.3 billion of our securities for future offers and sales in one or more transactions and in any combination of debt and/or equity. During November 2001, we completed the sale of 17,992,000 newly issued shares of common stock for $38.00 per share ($36.67 per share net of commissions and expenses) resulting in net proceeds of $659.8 million. As of December 31, 2005, there was $616.3 million of securities remaining registered for future offers and sales under the shelf registration statement. However, due to delays in our filings of one or more reports under the Securities Exchange Act of 1934, as amended, we believe that we are not eligible to use a Form S-3 registration statement at the present time. Accordingly, unless and until we regain eligibility to use Form S-3, we are not able to offer and sell securities under our shelf registration statement without first amending it to convert it to the registration statement form, Form S-1, that is currently available to us. Whether or not we seek to raise funds in the public equity or debt markets in the near term, we may decide, or the SEC may require us, to amend our shelf registration statement for the purpose of converting it to a Form S-1.

tangible assets and loss accruals for excess inventory and fixed purchase commitments under our supply contracts. Forecasted future cash flows in particular require considerable judgment and are subject to inherent imprecision. In the case of impairment testing, changes in estimates of future cash flows could result in a material impairment charge and, whether they result in an immediate impairment charge, could result prospectively in a reduction in the estimated remaining useful life of tangible or intangible assets, which could be material to the financial statements.


		This is generally at the time products are received by the customer. Accruals for estimated returns, rebates and chargebacks, determined based on historical experience, reduce revenues at the time of sale and are included in accrued expenses. Medicaid and certain other governmental pricing programs involve particularly difficult interpretations of relevant statutes and regulatory guidance, which are complex and, in certain respects, ambiguous. Moreover, prevailing interpretations of these statutes and guidance can change over time. Royalty revenue is recognized based on a percentage of sales (namely, contractually agreed-upon royalty rates) reported by third parties. See Note 2, Summary of Significant Accounting Policies, in our “Notes to Consolidated Financial Statements” included in this report.

In December 2004, the FASB issued SFAS No. 123(R), (“Share-based Payment”) that requires us to expense costs related to share-based payment transactions with employees. The SEC has issued an amendment to Rule 4-01(a) of Regulation S-X, changing the compliance date for SFAS 123(R) to the first annual reporting period beginning on or after June 15, 2005. SFAS No. 123(R) became mandatorily effective on January 1, 2006. Accordingly, we will adopt SFAS 123(R) in the first quarter of 2006. See Note 2 to the consolidated financial statements for the pro-forma effect on net income and earnings per share of applying SFAS 123.

In November 2004, the FASB issued SFAS No. 151, (Inventory Costs), an amendment of ARB No. 43. SFAS No. 151 requires certain abnormal expenditures to be recognized as expenses in the current period. It also requires that the amount of fixed production overhead allocated to inventory be based on the normal capacity of the production facilities. The standard is effective for the fiscal year beginning January 1, 2006. We are currently evaluating the effect that SFAS No. 151 will have on our financial reporting.

We are exposed to market risk for changes in the market values of some of our investments (Investment Risk) and the effect of interest rate changes (Interest Rate Risk). Our financial instruments are not currently subject to foreign currency risk or commodity price risk. We have no financial instruments held for trading purposes. At December 31, 2005, 2004 and 2003, we did not hold any derivative financial instruments. The quantitative and qualitative disclosures about market risk are set forth below.

The fair market value (“fair value”) of long-term fixed interest rate debt is subject to interest rate risk. Generally, the fair market value of fixed interest rate debt will increase as interest rates fall and decrease as interest rates rise. In addition, the fair value of our convertible debentures is affected by our stock price. The estimated fair value of our total long-term debt at December 31, 2005 was $336.6 million. Fair values were determined from available market prices, using current interest rates and terms to maturity. If interest rates were to increase or decrease 1%, the fair value of our long-term debt would increase or decrease by approximately $2.9 million.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required financial disclosure.

Management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Exchange Rule 13a-15(f). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As discussed in previous 10-Q filings, we made numerous personnel changes including hiring a new Chief Financial Officer and additional managerial level finance and accounting resources to perform supervisory review and monitoring activities. In addition, we have improved the efficiency and effectiveness of our financial closing process through automation, better coordination with external parties, and better organization within the finance and accounting function. As a result, we have implemented additional managerial level finance and accounting supervisory activities during the period-end financial reporting process. As a result of these efforts, we have concluded that the material weakness that existed at December 31, 2004 was fully remediated as of December 31, 2005.

The information called for by Part III of Form 10-K (Item 10 — Directors and Executive Officers of the Registrant, Item 11 — Executive Compensation, Item 12 — Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, Item 13 — Certain Relationships and Related Transactions, and Item 14 — Principal Accounting Fees and Services), is incorporated by reference from our proxy statement related to our 2006 annual meeting of shareholders, which will be filed with the SEC not later than April 30, 2006 (120 days after the end of the fiscal year covered by this report).

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of King Pharmaceuticals, Inc. and its subsidiaries at December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

Also, in our opinion, management’s assessment, included in Management’s Report on Internal Controls Over Financial Reporting as of December 31, 2005 appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of December 31, 2005 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

King Pharmaceuticals, Inc. (“King” or the “Company”) is a vertically integrated pharmaceutical company that develops, manufactures, markets and sells branded prescription pharmaceutical products. Through a national sales force and co-promotion arrangements, King markets its branded pharmaceutical products to general/family practitioners, internal medicine physicians, cardiologists, endocrinologists, neurologists, psychiatrists, pain specialists, sleep specialists, and hospitals across the United States and in Puerto Rico. The Company also provides contract manufacturing for a number of the world’s leading pharmaceutical and biotechnology companies. In addition, the Company receives royalties from the rights to certain products (including Adenoscan^®) previously sold.

Significant estimates for which it is reasonably possible that a material change in estimate could occur in the near term include forecasted future cash flows used in testing for impairments of intangible and tangible assets and loss accruals for excess inventory and fixed purchase commitments under the Company’s supply contracts. Forecasted future cash flows in particular require considerable judgment and are subject to inherent imprecision. In the case of impairment testing, changes in estimates of future cash flows could result in an immediate material impairment charge and, whether they result in an impairment charge, could result prospectively in a reduction in the estimated remaining useful life of tangible or intangible assets, which could be material to the financial statements.

Other significant estimates include accruals for Medicaid and commercial rebates, returns and chargebacks, allowances for doubtful accounts and estimates used in applying the revenue recognition policy and accounting for the Co-Promotion Agreement with Wyeth. Reserves for returns, chargebacks, Medicaid and commercial rebates each use the estimate of the level of inventory of the Company’s products in the distribution channel at the end of the period. The estimate of the level of inventory of the Company’s products in the distribution channel is based on data provided by our three key wholesalers under inventory management agreements.

Revenue recognition. Revenue is recognized when title and risk of loss are transferred to customers, collection of sales is reasonably assured, and the Company has no further performance obligations. This is generally at the time products are received by the customer. Accruals for estimated discounts, returns, rebates and chargebacks that are determined based on historical experience, reduce revenues at the time of sale and are included in accrued expenses. Royalty revenue is recognized based on a percentage of sales (namely, contractually agreed-upon royalty rates) reported by third parties.

Intangible Assets and Goodwill. Intangible assets, which include primarily acquired product rights, trademarks, and patents, are stated at cost, net of accumulated amortization. Amortization is computed over the estimated useful lives, ranging from two to forty years, using primarily the straight-line method. Goodwill is not amortized, but is tested for impairment on an annual basis during the first quarter, or more frequently if conditions warrant. We estimate the useful lives of the assets by factoring in the characteristics of the products such as: patent protection, competition by products prescribed for similar indications, estimated future introductions of competing products, and other factors. The Company evaluates the remaining useful lives of intangible assets each reporting period to determine whether events and circumstances warrant a revision to the remaining period of amortization. This evaluation is performed through the quarterly evaluation of intangibles for impairment. Further, on an annual basis, the Company reviews the life of each intangible asset and makes adjustments as deemed appropriate. The Company reviews its intangible assets for possible impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. The Company reviews goodwill for possible impairment annually, or whenever events or circumstances indicate that the carrying amount may not be recoverable. In evaluating goodwill for impairment, the Company estimates fair value of the Company’s individual business reporting units on a discounted cash flow basis. Assumptions and estimates used in the evaluation of impairment may affect the carrying value of long-lived assets, which could result in impairment charges in future periods. Such assumptions include projections of future cash flows and, in some cases, the current fair value of the asset. In addition, the Company’s amortization policies reflect judgments on the estimated useful lives of assets.

Accruals for rebates, returns, and chargebacks. The Company establishes accruals for returns, chargebacks, and commercial and Medicaid rebate obligations in the same period it recognizes the related sales. The accruals reduce revenues and are included in accrued expenses. At the time a rebate or chargeback payment is made or a product return is received, which occurs with a delay after the related sale, the Company records a reduction to accrued expenses and, at the end of each quarter, adjusts accrued expenses for differences between estimated and actual payments. Due to estimates and assumptions inherent in determining the amount of returns, chargebacks and rebates, the actual amount of product returns and claims for chargeback and rebates may be different from the Company’s estimates.

The Company’s product returns accrual is primarily based on estimates of future product returns over the period during which customers have a right of return, which is in turn based in part on estimates of the remaining shelf life of our products when sold to customers. Future product returns are estimated primarily based on historical sales and return rates. The Company estimates its commercial and Medicaid rebate accruals based on estimates of utilization by rebate-eligible customers, estimates of the level of inventory of its products in the distribution channel that remain potentially subject to those rebates, and the terms of its commercial and Medicaid rebate obligations. The Company estimates its chargeback accrual based on its estimates of the level of inventory of its products in the distribution channel that remain subject to chargebacks, and specific contractual and historical chargeback rates. The estimate of the level of our products in the distribution channel is based on data provided by our three key wholesalers under inventory management agreements.

The Company’s accruals for returns, chargebacks and rebates are adjusted as appropriate for specific known developments that may result in a change in its product returns or its rebate and chargeback obligations. In the case of product returns, the Company monitors demand levels for its products and the effects of the introduction of competing products and other factors on this demand. When the Company identifies decreases in demand for products or experience higher than historical rates of returns caused by unexpected discrete events, it further analyzes these products for potential additional supplemental reserves.

Investments in Debt Securities. The Company invests in auction rate securities as part of its cash management strategy. Auction rate securities are long-term variable rate bonds tied to short-term interest rates that are reset through an auction process generally every seven to 35 days. Previously, the Company classified auction rate securities as “Cash and Cash Equivalents” due to the liquidity provided by the auction process. In accordance with generally accepted accounting principles, the Company revised the classification of auction rate securities for all periods presented as “Investments in Debt Securities” in the accompanying consolidated balance sheet. See Note 4.

Marketable Securities. The Company classifies its marketable securities as available-for-sale. These securities are carried at fair market value based on current market quotes, with unrealized gains and losses reported in shareholders’ equity as a component of accumulated other comprehensive income. Gains or losses on securities sold are based on the specific identification method. The Company reviews its investment portfolio as deemed necessary and, where appropriate, adjusts individual securities for other-than-temporary impairments. The Company does not hold these securities for speculative or trading purposes.

Accounts Receivable and Allowance for Doubtful Accounts. Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is management’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. Management determines the allowance based on historical experience along with the present knowledge of potentially uncollectible accounts. Management reviews its allowance for doubtful accounts quarterly. Past due balances over 120 days and greater than a specified amount are reviewed individually for collectibility. All other balances are reviewed on a pooled basis by type of receivable. Account balances are charged off against the allowance when management feels it is probable the receivable will not be recovered. The Company does not have any off-balance-sheet credit exposure related to customers.

Inventories. Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. Product samples held for distribution to physicians and other healthcare providers represent approximately 3% and 4% of inventory as of December 31, 2005 and 2004, respectively. The Company has fixed purchase commitments under supply contracts for certain raw materials. A loss accrual is recorded when the total inventory for a product is projected to be more than the forecasted demand.

Litigation. At various times the Company may be involved in patent, product liability, consumer, commercial, environmental and tax litigations and claims; government investigations; and other legal proceedings that arise from time to time in the ordinary course of business (see Note 19). The Company accrues for amounts related to these legal matters if it is probable that a liability has been incurred and an amount is reasonably estimable. If the estimated amount of the liability is a range and some amount within the range appears to be a better estimate than any other amount within the range, that amount is

In the event that facts and circumstances indicate that the carrying amount of property, plant and equipment may be impaired, evaluation of recoverability is performed using the estimated future undiscounted cash flows associated with the asset compared to the asset’s carrying amount to determine if a write-down is required. To the extent such projection indicates that undiscounted cash flow is not expected to be adequate to recover the carrying amount, the asset would be written down to its fair value using discounted cash flows.

Research and Development Costs. Research and development costs are expensed as incurred. Upfront and milestone payments made to third parties in connection with research and development collaborations are expensed as incurred up to the point of regulatory approval. Payments made to third parties subsequent to regulatory approval are capitalized and amortized over the remaining useful life. Amounts capitalized for such payments are included in intangibles assets. Acquired research and development projects for products that have not received regulatory approval and that do not have alternative future use are expensed.

Stock Compensation. The Company has adopted the disclosure only provision of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock Based Compensation,” as amended by SFAS No. 148. Accordingly, since options were granted at a strike price equal to market price at the date of grant, no compensation cost has been recognized for stock options granted to date. The Company recognizes compensation expense for restricted stock on a straight-line basis over the period that the restrictions expire. Had compensation cost been determined for options granted, consistent with SFAS No. 123, the Company’s net income (loss) and diluted income (loss) per share would have decreased (increased) to the following pro forma amounts for the years ended December 31, 2005, 2004 and 2003:

The Company invests its excess cash in auction rate securities as part of its cash management strategy. Auction rate securities are long-term variable rate bonds tied to short-term interest rates that are reset through an auction process generally every seven to 35 days. As of December 31, 2004, the Company classified auction rate securities as “Cash and Cash Equivalents” due to the liquidity provided by the auction process. In accordance with generally accepted accounting principles, the Company revised the classification of auction rate securities for all periods presented as “Investments in Debt Securities” in the accompanying consolidated balance sheet. As of the years ended December 31, 2005 and 2004, there were no cumulative gross unrealized holdings gains or losses on investments in debt securities.

As of the years ended December 31, 2005 and 2004, auction rate securities totaled $494,663 and $149,430, respectively. The revised classification in the Company’s consolidated statement of cash flows for the twelve months ended December 31, 2004 resulted in a decrease of $46,505 in cash from investing activities representing the increases in its holdings in auction rate securities. As of December 31, 2003 auction rate securities totaled $102,925, resulting in an increase of $415,575 in cash from investing activities for the twelve months ended December 31, 2003 representing reductions in holdings in auction rate securities.

January 2003, and a further interpretation of FIN 46 in December 2003 (FIN 46-R, and collectively FIN 46). FIN 46 clarifies the application of ARB No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties, referred to as variable interest entities (“VIE”). While the Company has or has had interests in Novavax and Palatin, the Company is not considered to be the primary beneficiary of these entities. Therefore, in accordance with the provisions of FIN No. 46, the Company has not consolidated the financial statements of those entities into its consolidated financial statements.

The Company’s calculation of its product returns reserves is based on historical sales and return rates over the period during which customers have a right of return. The Company also considers current wholesale inventory levels of the Company’s products. Based on data received pursuant to the Company’s inventory management agreements with its three key wholesale customers, there was a significant reduction of wholesale inventory levels of the Company’s products during the first quarter of 2005. This reduction was primarily due to sales to retail outlets by the Company’s wholesale customers, not returns of these products to the Company. This reduction resulted in a change in estimate during the first quarter of 2005 that decreased the Company’s reserve for returns by approximately $20,000 and increased net sales from branded pharmaceuticals, excluding the adjustment to sales classified as discontinued operations, by the same amount. During the second quarter of 2005, the Company decreased its reserve for returns by approximately $5,000 and increased its net sales from branded pharmaceuticals, excluding the adjustment to sales classified as discontinued operations, by the same amount as a result of an additional reduction in wholesale inventory levels of the Company’s branded products.

During the third quarter of 2005, the Company’s actual returns of branded pharmaceutical products continued to decrease significantly compared to actual returns during the quarterly periods in 2004 and the first quarter of 2005. Additionally, based on data received pursuant to the Company’s inventory management agreements with its key wholesale customers, the Company continued to experience normalized wholesale inventory levels of its branded pharmaceutical products during the third quarter of 2005. Accordingly, the Company believed that the rate of returns experienced during the second and third quarters of 2005 was more indicative of what it should expect in future quarters and adjusted its returns reserve accordingly. This change in estimate resulted in a decrease of approximately $15,000 in the returns reserve in the third quarter of 2005 and a corresponding increase in net sales from branded pharmaceutical products, excluding the adjustment to sales classified as discontinued operations. As a result of this increase in net sales, the co-promotion expense related to net sales of Altace^® in the third quarter of 2005 increased by approximately $5,000. The effect of the change in estimate on third quarter 2005 operating income was, therefore, approximately $10,000.

As a result of the Company’s previously disclosed determination that it underpaid amounts due to Medicaid and other government pricing programs from 1998 through 2002, as further discussed in Note 19, the Company refined its calculation of the Average Manufacturer’s Price (“AMP”) and Best Price in compliance with federal laws and regulations. During the third quarter of 2005, the Company began reporting to the Centers for Medicare and Medicaid Services using the refined calculation for computing AMP and Best Price. In addition, during the third quarter of 2005, the Company recalculated rebates due with respect to prior quarters utilizing the refined AMP and Best Price calculations. As a result of this updated information, during the third quarter of 2005, the Company decreased its reserve for estimated Medicaid and other government pricing program obligations and increased net sales from branded pharmaceutical products by approximately $21,000, approximately $8,000 of which related to prior years. This does not include the adjustment to sales classified as discontinued operations. As a result of the increase in net sales, the co-promotion expense related to net sales of Altace^® increased by approximately

Rochester facility, excluding that associated with the production of Bicillin^®, was $65,964. Overall production volume at this facility has been declining. The Company currently is transferring to this facility the manufacture of certain products that are currently manufactured by the Company at other Company facilities or for the Company by third parties. These transfers should increase production and cash flow at the Rochester facility. Management currently believes that the long-term assets associated with the Rochester facility are not impaired based on estimated undiscounted future cash flows. However, if production volumes continue to decline or if the Company is not successful in transferring additional production to the Rochester facility, the Company may have to write-off a portion of the property, plant, equipment associated with this facility.

During the fourth quarter of 2005, the Company entered into a strategic alliance with Pain Therapeutics, Inc. (“Pain Therapeutics”) to develop and commercialize Remoxy™ and other abuse-resistant opioid painkillers. Remoxy™ is an investigational drug in late-stage clinical development by Pain Therapeutics for the treatment of moderate-to-severe chronic pain. The Company paid $150,000 at the time of close plus acquisition costs of approximately $3,700 and could make additional milestone payments of up to $150,000 in cash based on the successful clinical and regulatory development of Remoxy™ and other abuse-resistant opioid products. This includes a $15,000 cash payment upon acceptance of a regulatory filing for Remoxy™ and an additional $15,000 upon its approval. The Company is responsible for all research and development expenses related to this alliance, which could total $100,000. After regulatory approval and commercialization of Remoxy™ or other abuse-resistant opioid products developed through this alliance, the Company will pay a royalty of 15% of cumulative net sales up to $1,000,000 and 20% of cumulative net sales over $1,000,000. King is also responsible for the payment of third-party royalty obligations of Pain Therapeutics related to products developed under this collaboration. The Company determined Pain Therapeutics is a VIE, however, the Company is not considered to be the primary beneficiary of this entity. Therefore, in accordance with the provisions of FIN No. 46, the Company has not consolidated the financial statements of this entity into its consolidated financial statements.

In connection with the strategic alliance with Pain Therapeutics, the initial collaboration fee and acquisition costs of $153,711 were classified as in-process research and development in the accompanying financial statements. The value of the in-process research and development project was expensed on the date of acquisition as it had not received regulatory approval and had no alternative future use. Remoxy™ is in Phase III clinical trial. If this Phase III clinical trial is successful, the Company currently anticipates obtaining FDA approval in 2008 or 2009. The Company believes there is a reasonable probability of completing the project successfully. However, the success of the project depends on the outcome of the Phase III clinical trial and the ability to successfully manufacture the product. If the project is not successfully completed, it could have a material effect on our cash flows and results of operations. The in-process research and development is part of the branded pharmaceutical segment.

On December 6, 2005, the Company entered into a co-exclusive license agreement with Mutual Pharmaceutical Company, Inc. (“Mutual”). Under the terms of the agreement, each of the parties has granted the other a worldwide license to certain intellectual property, including patent rights and know-how, relating to metaxalone. The intellectual property licensed to King relates to the potential for improved dosing and administration of metaxalone. The Company paid Mutual an upfront payment of $35,000 and will pay royalties on net sales of products containing metaxalone beginning January 1, 2006. This royalty rate may increase depending on the achievement of certain regulatory and commercial milestones.

In connection with the license agreement with Mutual, the upfront payment of $35,000 has been classified as in-process research and development in the accompanying financial statements. The intellectual property licensed to King relates to the potential for improved dosing and administration of metaxalone. The value of the in-process research and development project was expensed on the date of acquisition as it had not received regulatory approval. The Company is in the process of evaluating a potential new formulation of Skelaxin^®. The success of the project will depend on additional in vitro and in vivo work in a clinical setting. The costs and the time-line of the potential project are being evaluated. The in-process research and development is part of the branded pharmaceutical segment.

On August 12, 2004, the Company entered into a collaborative agreement with Palatin to jointly develop and, on obtaining necessary regulatory approvals, commercialize Palatin’s PT-141 for the treatment of male and female sexual dysfunction for $20,000 plus acquisition costs of $498. Pursuant to the terms of the agreement, Palatin has granted King a co-exclusive license with Palatin to PT-141 in North America and an exclusive right to collaborate in the licensing or sublicensing of PT-141 with Palatin outside North America. At the time of closing King received approximately 1,176 shares of Palatin common stock and approximately 235 warrants for the right to purchase Palatin common stock. Of the total purchase price, $3,093 was allocated to the common stock, $260 was allocated to the warrants, and the remaining $17,145 was allocated to in-process research and development. During the third quarter of 2005, King invested an additional $10,000 in Palatin under the terms of this collaboration agreement. King received 4,499 shares of common stock and 720 warrants for the right to purchase Palatin Technologies, Inc. common stock. Of the total investment, $9,149 was allocated to the common stock and $851 was allocated to the warrants. This investment reduced the equity portion of the milestone payments due Palatin upon completion of Phase II clinical trials by the same amount. In addition to the initial purchase price and the investment during 2005, King may pay additional potential milestone payments to Palatin of up to $90,000 for achieving certain development and regulatory approval targets. A portion of these milestone payments could consist of additional equity investments in Palatin. After regulatory approval and commercialization of PT-141, King may also pay potential milestone payments to Palatin of up to $130,000 upon achieving specified annual North American net sales thresholds. King and Palatin will share all collaboration development and marketing costs associated with and collaboration net profits derived from PT-141 based upon an agreed percentage.

On December 19, 2000, September 7, 2001, and June 24, 2002, the Company acquired convertible senior notes of $20,000, $10,000 and $10,000, respectively, from Novavax, Inc. (“Novavax”). The Company sold all of its Novavax convertible notes to Novavax on July 19, 2004. During 2002, the convertible senior notes were deemed to be impaired as defined under SFAS No. 114, “Accounting by Creditors for Impairment of a Loan.” The Company recorded a valuation allowance of $35,443 during 2002. During 2003, this valuation allowance was reduced by $18,551. During 2004, the valuation allowance was increased by $2,887. The Company determined the amount of the valuation allowance by reference to the December 31, 2002, December 31, 2003 and June 30, 2004 quoted market price of the Novavax common stock.

On July 19, 2004, the Company and Novavax mutually agreed to end their co-promotion and license agreements regarding Estrasorb^tm. As part of this transaction, Novavax reacquired all rights to Estrasorb^tm as well as all rights to other women’s health products that Novavax may successfully develop utilizing its micellar nanoparticle technology. Additionally, Novavax repurchased all of its convertible notes held by King, acquired a portion of King’s women’s health field sales force, and received approximately $8,000 from the Company to provide support for marketing and promotion. In return, Novavax paid King $22,000

and issued approximately 3,776 shares of Novavax common stock to King. This transaction resulted in a net gain in the amount of $4,021 during the third quarter of 2004. As a result of this transaction, King owned approximately 4,101 shares of common stock of Novavax that the Company accounted for as available for sale securities. As of September 30, 2004, March 31, 2005 and June 30, 2005, the Company determined the decline in fair value of the Company’s equity interest in Novavax was other than temporary and recorded charges of $6,520, $6,853 and $369, respectively, which is reflected in loss on investment in the accompanying consolidated financial statements. During the third quarter of 2005, the Company sold its equity interest in Novavax resulting in a gain on the sale of $1,040.

On June 30, 2004, the Company sold the Anusol-HC^® and Proctocort^® product lines to Salix Pharmaceuticals, Inc. (“Salix”) for $13,000. In addition, the Company sold inventory of Anusol-HC^® and Proctocort^® to Salix for $337. The assets sold included related product assets, intangible property, advertising and promotional materials, and labeling and packaging materials. As part of the transaction, the Company will contract manufacture the Anusol-HC^® and Proctocort^® product lines for two years. The Company recorded a $4,715 gain on the sale of the Anusol-HC^® and Proctocort^® product lines, which is included in the gain on sale of products in the accompanying consolidated financial statements.

On September 8, 2003, the Company sold the Soloxine^®, Pancrezyme^®, Tumil-K^®, Uroeze^®, and Ammonil product lines (the “animal health products”) to Virbac Corporation (“Virbac”) for $15,133, including $1,823 allocated to the contract manufacturing obligation. These assets included related product assets, intellectual property, unfilled customer orders, inventories and manufacturing equipment. As part of the transaction, the Company contract manufactured the Soloxine^® product for Virbac for up to one year. Of the selling price, $1,500 was placed into escrow and was not available to the Company until the earlier of one year from the closing date or the occurrence of certain events. The Company recorded a $10,307 gain on the sale of the animal health products, which is included in the gain on sale of products in the accompanying consolidated financial statements.

The total initial purchase price of $814,368 includes the cost of acquisition, assumed liabilities and a portion of contingent liabilities. See the allocation of the purchase price in the table below. The identifiable intangible assets were assigned useful lives with a weighted-average range of 16.5 years as of the date of acquisition. The acquired business is included in the branded pharmaceuticals segment. In connection with this acquisition, $163,416 was placed into escrow to satisfy the deferred obligations to Wyeth that were assumed by the Company in connection with the acquisition. Since the Company was entitled to the interest income and can direct investments of the escrow fund, the Company included the escrow amount in current restricted cash and other long-term assets as restricted cash. The $163,416 placed into escrow was included in the purchase price as liabilities acquired. These deferred obligations were payable on a quarterly basis through March 2005. During 2005, 2004, and 2003, the deferred obligation paid to Wyeth from funds in escrow was $29,605, $66,060, and $67,751, respectively.

Of the total estimated purchase price, $175,000 was allocated to an acquired in-process research and development project associated with the Company’s acquisition of rights to new formulations of Sonata^®. Specifically, the goal of the project was to successfully develop a modified-release formulation of Sonata^® (“Sonata^® MR”) that would enable patients who have difficulty staying asleep to remain asleep for a longer period of time when utilizing the reformulated product. The value of the acquired in-process research and development project was expensed on the date of acquisition, as it had not received regulatory approval as of that date and had no alternative future use. The project was valued through the application of a probability-weighted, discounted cash flow approach with the assistance of an independent valuation specialist. The estimated cash flows were projected over a 25-year period utilizing a discount rate of 20%. The estimated cost to complete the project at the time of the acquisition was approximately $120,000, which included up to $71,000 that would be paid upon successful attainment of certain significant development milestones of the project. At the time of the acquisition, the project was in Phase I of clinical development.

Elan commenced a Phase II clinical trial program for the purpose of developing Sonata^® MR in March 2004. However, the Phase II clinical trial results showed that the Sonata^® MR formulations that Elan developed did not meet contractually required specifications. After several months of review, the Company concluded that it was not possible for Elan to develop a Sonata^® MR formulation meeting the contractually required specifications. Accordingly, the Company decided to discontinue the Sonata^® MR clinical program and terminated the agreement with Elan. On August 26, 2005, Elan filed a request for mediation pursuant to the terms of the agreement. The Company participated in mediation with Elan in early 2006, which did not result in an agreed resolution. As of December 31, 2005, the Company has accrued $5,000 as a potential loss under the contract.

On January 8, 2003, the Company completed its acquisition of Meridian Medical Technologies, Inc. (“Meridian”). Meridian is a leading manufacturer of auto-injectors for the self-administration of injectable pharmaceuticals. The Company paid a cash price of $44.50 per common share to Meridian shareholders, totaling approximately $246,592, and incurred $7,317 of expenses related to the transaction resulting in a total purchase price of $253,909.

As mentioned above, $19,000 of the purchase price was allocated to an acquired in-process research and development project, an auto-injector pre-filled with diazepam indicated for, among other things, the treatment of epileptic seizures and management of anxiety disorders which the Company has named “Vanquix^TM”. The value of the acquired in-process research and development project was expensed on the date of acquisition, as it had not received regulatory approval and had no alternative future use. The project was valued through the application of a probability-weighted, discounted cash flow approach with the assistance of an independent valuation specialist. The estimated cash flows were projected over a 30-year period utilizing a discount rate of 21%. Pre-tax margins (after an adjustment to reflect the use of auto-injector core technology) were assumed to be (10%) in 2003 and improving to 23% in 10 years. The estimated cost to complete the project was less than $700. The project was originally submitted to the FDA as an Abbreviated New Drug Application (“ANDA”), which referenced an approved New Drug Application (“NDA”) owned by the United States Army for a diazepam-filled auto-injector currently manufactured under contract exclusively by Meridian. The project as originally contemplated was substantially complete as of the valuation date. At the time of valuation, the Company anticipated FDA approval of the project during 2004. In May 2004, the Company received a letter from the FDA advising the Company that its ANDA was not approvable. The FDA raised concerns regarding whether the product, a self-injectable therapy, is appropriate for self-diagnosis and use. Following discussions with the FDA, the Company started the Phase III clinical trial for Vanquix^TM in the first quarter of 2006. Even if the project is not successfully completed, it would not materially adversely affect the Company’s results of operations.

On December 30, 2002, the Company acquired the exclusive rights to Synercid^® from Sanofi-Aventis. As additional consideration to Sanofi-Aventis for Synercid^®, the Company agreed to potential milestone payments totaling $75,000. On December 31, 2005, December 31, 2004, and December 31, 2003, the Company paid Sanofi-Aventis milestone payments of $18,600, $21,200, and $10,300 respectively, for the continued recognition of Synercid^® as an effective treatment for vancomycin-resistant enterococcus faecium. The remaining $25,000 milestone is payable to Sanofi-Aventis if Synercid^® should receive FDA approval to treat methicillin resistant staphylococcus aureus, or King will pay Sanofi-Aventis a one-time payment of $5,000 the first time during any twelve-month period net sales of Synercid^® exceed $60,000, and a one-time payment of $20,000 the first time during any twelve-month period net sales of Synercid^® exceed $75,000.

New competitors to Sonata^® entered the market during 2005. Prescriptions for Sonata^® have not met expectations. As a result, the Company lowered its future sales forecast for this product in both the second and fourth quarters of 2005, which decreased the estimated undiscounted future cash flows associated with the Sonata^® intangible assets to a level below their carrying values as of those dates. Accordingly, the Company recorded intangible asset impairment charges of $126,923 and $42,582 during the second and fourth quarters of 2005, respectively, to adjust the carrying value of the Sonata^® intangible assets on the Company’s balance sheet to reflect the estimated fair value of these assets. The Company determined the fair value of the intangible assets associated with Sonata^® based on its estimated discounted future cash flows as of those dates. Sonata^® is included in the Company’s branded pharmaceuticals reporting segment.

During the third and fourth quarters of 2004, the Company recorded intangible asset impairment charges totaling $82,081 due to the Company’s decision to discontinue the clinical program to develop a modified-release formulation of Sonata^®. These impairment charges were based on the estimated fair values of the expected cash flows of the intangible asset at the balance sheet dates. Pursuant to an agreement between the Company and Elan, Elan commenced a Phase II clinical trial program for the purpose of developing a modified release formulation of Sonata^® (“Sonata^® MR”) in March 2004. However, the Phase II clinical trial results showed that the Sonata^® MR formulations that Elan developed did not meet contractually required specifications. After several months of review, the Company concluded that it was not possible for Elan to develop a Sonata^® MR formulation meeting the contractually required specifications. Accordingly, the Company decided to discontinue the Sonata^® MR clinical program and terminated the agreement with Elan. See Note 10.

As a result of a continuing decline in Corzide^® prescriptions and the anticipation of additional competition in the future, the Company lowered its future sales forecast for this product which decreased the estimated undiscounted future cash flows associated with the Corzide^® intangible assets to a level below their carrying value. Accordingly, the Company recorded an intangible asset impairment charge of $43,243 during the fourth quarter of 2005 to adjust the carrying value of the Corzide^® intangible assets on the Company’s balance sheet to reflect the estimated fair value of these assets. The Company determined the fair value of the intangible assets associated with Corzide^® based on its estimated discounted future cash flows. Corzide^® is included in the Company’s branded pharmaceuticals reporting segment.

As a result of a continuing decline in end-user demand for Synercid^® outside of the United States, the Company determined the estimated undiscounted future cash flows associated with sales of this product outside of the United States were at a level below their carrying value of the Synercid^® intangible assets that are assigned to the markets for this drug outside of the United States. Accordingly, the Company recorded an intangible asset impairment charge of $8,307 during the fourth quarter of 2005 to adjust the carrying value of these Synercid^® intangible assets on the Company’s balance sheet to reflect the estimated fair value of these assets. The Company determined the fair value of the intangible assets associated with the markets for Synercid^® outside the United States based on their estimated discounted future cash flows. Synercid^® is included in the Company’s branded pharmaceuticals reporting segment.

The Rochester, Michigan facility manufactures several products for the Company, including Aplisol^® and Coly-Mycin^®. The products that are manufactured at this facility are considered one asset group and evaluated for impairment together. The Company reviewed the Rochester intangible assets for impairment under SFAS No. 144. Based on that review, the Company determined that the Rochester intangible assets were impaired and recorded an impairment charge of $17,492 during the third quarter of 2004. The Rochester intangible assets are part of the branded pharmaceutical segment.

assets. During the first quarter of 2004, the Company recorded intangible asset impairment charges totaling $34,936 primarily due to a greater than anticipated decline in prescriptions for Florinef^® and Tapazole^® as a result of the availability of generics for these products. The Company determined the fair value of the intangible assets associated with Florinef^® and Tapazole^® based on management’s discounted cash flow projections for these products. Florinef^® and Tapazole^® are included in the Company’s branded pharmaceuticals reporting segment.

As a result of a continuing decline in Lorabid^® prescriptions, the Company determined in 2003 that it would not be able to sell all the Lorabid^® product required to be purchased under its supply contract with Eli Lilly. Accordingly, under the requirements of Accounting Research Bulletin No. 43, during the fourth quarter of 2003 and 2004 the Company recorded $29,959 and $4,483, respectively, for purchase commitments in excess of expected demand as a charge to cost of revenues. During 2005, the contract ended, and as of December 31, 2005 the Company did not have an excess purchase commitment accrual related to Lorabid^®.

During the fourth quarter of 2003 and the third quarter of 2004, the Company incurred intangible asset impairment charges totaling $13,646 and $10,711, respectively, that were related to certain of the Company’s smallest branded pharmaceutical products and the write-off of some unutilized intangible assets. The impairment charges related to the branded pharmaceutical products were primarily the result of declining prescriptions and manufacturing issues with respect to these products. The impairment charge related to the unutilized intangible assets were the result of the Company’s assessment of the prospects for commercialization of products utilizing those intangible assets. All of the affected intangible assets were part of the branded pharmaceuticals segment.

Demand for some of the Company’s non-key products, including but not limited to Intal^®, Tilade^® and Synercid^®, declined over the past year at a rate which triggered a review of the intangible assets associated with these products. As of December 31, 2005, the net intangible assets associated with these three products totals approximately $196,684. The Company believes that these intangible assets are not currently impaired based on estimated undiscounted cash flows associated with these assets. However, if demand for the products associated with these intangible assets declines below current expectations, the Company may have to reduce the estimated remaining useful life and/ or write off a portion or all of these intangible assets.

The Company sponsors a defined contribution employee retirement savings 401(k) plan that covers all employees over 21 years of age. The plan allows for employees’ contributions, which are matched by the Company up to a specific amount under provisions of the plan. Company contributions during the years ended December 31, 2005, 2004 and 2003 were $4,953, $4,858, and $3,860, respectively. The plan also provides for discretionary profit-sharing contributions by the Company. There were no discretionary profit-sharing contributions during the years ended December 31, 2005, 2004 and 2003.

Many distributors, marketers and manufacturers of anorexigenic drugs have been subject to claims relating to the use of these drugs. Generally, the lawsuits allege that the defendants (1) misled users of the products with respect to the dangers associated with them, (2) failed to adequately test the products and (3) knew or should have known about the negative effects of the drugs, and should have informed the public about the risks of such negative effects. The actions generally have been brought by individuals in their own right and have been filed in various state and federal jurisdictions throughout the United States. They seek, among other things, compensatory and punitive damages and/or court-supervised medical monitoring of persons who have ingested the product. The Company is one of many defendants in no more than six lawsuits that claim damages for personal injury arising from the Company’s production of the anorexigenic drug phentermine under contract for GlaxoSmithKline.

While the Company cannot predict the outcome of these suits, the Company believes that the claims against it are without merit and intends to vigorously pursue all defenses available to it. The Company is being indemnified in all of these suits by GlaxoSmithKline, for which the Company manufactured the anorexigenic product, provided that neither the lawsuits nor the associated liabilities are based upon the independent negligence or intentional acts of the Company, and the Company intends to submit a claim for all unreimbursed costs to the Company’s product liability insurance carrier. However, in the event that GlaxoSmithKline is unable to satisfy or fulfill its obligations under the indemnity, the Company would have to defend the lawsuits and be responsible for damages, if any, that are awarded against it or for amounts in excess of the Company’s product liability coverage. A reasonable estimate of possible losses related to these suits cannot be made.

In addition, King Pharmaceuticals Research and Development, Inc. (“King R&D”), successor to Jones Pharma Incorporated (“Jones”) and a wholly owned subsidiary of the Company, is a defendant in approximately 143 multi-defendant lawsuits involving the manufacture and sale of dexfenfluramine, fenfluramine and phentermine. These suits have been filed in various jurisdictions throughout the United States, and in each of these suits King R&D, as the successor to Jones, is one of many defendants, including manufacturers and other distributors of these drugs. Although Jones did not at any time manufacture dexfenfluramine, fenfluramine, or phentermine, Jones was a distributor of a generic phentermine product and, after its acquisition of Abana Pharmaceuticals, was a distributor of Obenix^®, its branded phentermine product. The plaintiffs in these cases claim injury as a result of ingesting a combination of these weight-loss drugs and are seeking compensatory and punitive damages as well as medical care and court-supervised medical monitoring. The plaintiffs claim liability based on a variety of

King R&D denies any liability incident to the distribution of Obenix^® or Jones’ generic phentermine product and intends to pursue all defenses available to it. King R&D has tendered defense of these lawsuits to its insurance carriers for handling and they are currently defending King R&D in these suits. The manufacturers of fenfluramine and dexfenfluramine have settled many of these cases. In the event that King R&D’s insurance coverage is inadequate to satisfy any resulting liability, King R&D will have to resume defense of these lawsuits and be responsible for the damages, if any, that are awarded against it.

While the Company cannot predict the outcome of these suits, management believes that the claims against King R&D are without merit and intends to vigorously pursue all defenses available. The Company is unable to disclose an aggregate dollar amount of damages claimed because many of these complaints are multi-party suits and do not state specific damage amounts. Rather, these claims typically state damages as may be determined by the court or similar language and state no specific amount of damages against King R&D. The Company cannot reasonably estimate possible losses related to the lawsuits.

In these cases, the plaintiffs attempt to link the receipt of the mercury-based products to neurological defects. The plaintiffs claim unfair business practices, fraudulent misrepresentations, negligent misrepresentations, and breach of implied warranty, which are all arguments premised on the idea that the defendants promoted products without any reference to the toxic hazards and potential public health ramifications resulting from the mercury-containing preservative. The plaintiffs also allege that the defendants knew of the dangerous propensities of thimerosal in their products.

The Company’s product liability insurance carrier has been given proper notice of all of these matters and defense counsel is vigorously defending the Company’s interests. The Company has filed motions to dismiss due, among other things, to lack of product identity in the plaintiffs’ complaints. In 2001, the Company was dismissed on this basis in a similar case. The Company intends to defend these lawsuits vigorously but is unable currently to predict the outcome or reasonably estimate the range of potential loss, if any.

The Company has been named as a defendant in seventeen lawsuits involving the manufacture and sale of hormone replacement therapy drugs. Numerous pharmaceutical companies have also been sued. These cases have been filed in Alabama, Arkansas, Missouri, Pennsylvania, Ohio, Minnesota, Florida, Maryland and Mississippi. The plaintiffs allege that King and other defendants failed to conduct adequate pre-approval research and post-approval surveillance to establish the safety of the long-term hormone therapy regimen, thus misleading consumers when marketing their products. Plaintiffs’ claims include allegations of negligence, strict liability, breach of implied warranty, breach of express warranty, fraud and misrepresentation. The Company intends to defend these lawsuits vigorously but is unable currently to predict the outcome or reasonably estimate the range of potential loss, if any.

by the City of New York (“NYC”) in federal court in the state of New York. NYC claims that the defendants fraudulently inflated their Average Wholesale Prices and fraudulently failed to accurately report their “Best Prices” and their Average Manufacturer’s Prices and failed to pay proper rebates pursuant to federal law. Additional claims allege violations of federal and New York statutes, fraud and unjust enrichment. For the period from 1992 to the present, NYC is requesting money damages, civil penalties, declaratory and injunctive relief, restitution, disgorgement of profits, and treble and punitive damages.

In August 2004, a defendant in the NYC action sought to have the action transferred to the United States District Court for the District of Massachusetts and combined with existing multi-district litigation, entitled “In re Pharmaceutical Industry Average Wholesale Pricing Litigation,” being heard by that court. A conditional transfer order was issued during September 2004 indicating that the action is subject to transfer for pretrial proceedings to the United States District Court for the District of Massachusetts. The Company intends to defend this lawsuit vigorously but is unable currently to predict the outcome or reasonably estimate the range of loss, if any.

The Company also has been named as a defendant along with other pharmaceutical manufacturers in thirty-four other lawsuits containing allegations of fraudulently inflating average wholesale prices. These lawsuits have been filed in federal courts in New York and Massachusetts, and in state courts in New York, Mississippi and Alabama, some of which the Company is seeking to have transferred to the United States District Court for the District of Massachusetts and combined with the existing multi-district litigation.

On October 31, 2005, the Company entered into (i) a definitive settlement agreement with the United States of America, acting through the United States Department of Justice and the United States Attorney’s Office for the Eastern District of Pennsylvania and on behalf of the Office of Inspector General of the United States Department of Health and Human Services (“HHS/ OIG”) and the Department of Veterans Affairs, to resolve the governmental investigations related to the Company’s underpayment of rebates owed to Medicaid and other governmental pricing programs during the period from 1994 to 2002 (the “Federal Settlement Agreement”), and (ii) similar settlement agreements with 48 states and the District of Columbia (collectively, the “State Settlement Agreements”, and together with the Federal Settlement Agreement, the “Settlement Agreements”). The Company has agreed to a settlement with the remaining state on substantially the same terms as the other state settlements, and the Company currently expects to enter into a definitive settlement agreement with that state before the end of the first quarter of 2006. Consummation of the Federal Settlement Agreement and some State Settlement Agreements is or was subject to court approval. On February 24, 2006, the United States District Court for the Eastern District of Pennsylvania (“District Court”) approved the Federal Settlement Agreement. All interested parties, including King, the individual purportedly acting as a “relator” under the False Claims Act and the affected states, have requested that the District Court approve the State Settlement Agreements that require court approval.

Pursuant to the Settlement Agreements, the Company agreed to pay a total of approximately $124,100 (the “Settlement Amount”) and interest on the Settlement Amount at the rate of 3.75% from July 1, 2005 to the date of consummation of the settlement. The Company has further agreed to pay, subject to certain conditions, (i) legal fees relating to the settlement in the amount of approximately $800, and (ii) approximately $1,000 in settlement costs. The Settlement Amount includes approximately $50,600 for payment to 49 states and the District of Columbia. The Settlement Amount includes approximately $63,700 representing the amount of underpayments to Medicaid and other governmental pricing programs from 1994 to 2002 and approximately $60,400 to cover interest, penalties and other costs.

The Company accrued in prior years a total of $130,400 in respect of its estimated underpayments to Medicaid and other governmental pricing programs and estimated settlement costs with all relevant governmental parties, which sum is classified as restricted cash and an accrued expense in the accompanying balance sheet. This sum is sufficient to cover the full cost of all sums owed the federal and state governments pursuant to the Settlement Agreements, together with related obligations to reimburse the expenses of some of the parties.

As previously reported, the SEC has also been conducting an investigation relating to the Company’s underpayments to governmental programs, as well as into the Company’s previously disclosed errors relating to reserves for product returns. While the SEC’s investigation is continuing with respect to the product returns issue, the Staff of the SEC has advised the Company that it has determined not to recommend enforcement action against the Company with respect to the aforementioned governmental pricing matter. The Staff of the SEC notified the Company of this determination pursuant to the final paragraph of Securities Act Release 5310. Although the SEC could still consider charges against individuals in connection with the governmental pricing matter, the Company does not believe that any governmental unit with authority to assert criminal charges is considering any charges of that kind.

subsidiary, and a former director of the subsidiary in the United States District Court for the Eastern District of Tennessee, alleging violations of the Securities Act of 1933 and/or the Securities Exchange Act of 1934, in connection with the Company’s underpayment of rebates owed to Medicaid and other governmental pricing programs, and certain transactions between the Company and the Benevolent Fund. These 22 complaints have been consolidated in the United States District Court for the Eastern District of Tennessee. In addition, holders of the Company’s securities filed two class action complaints alleging violations of the Securities Act of 1933 in Tennessee state court. The Company removed these two cases to the United States District Court for the Eastern District of Tennessee, where these two cases were consolidated with the other class actions. The district court has appointed lead plaintiffs in the consolidated action, and those lead plaintiffs filed a consolidated amended complaint on October 21, 2003 alleging that King, through some of its executive officers, former executive officers, directors, and former directors, made false or misleading statements concerning its business, financial condition, and results of operations during periods beginning February 16, 1999 and continuing until March 10, 2003. Plaintiffs in the consolidated action have also named the underwriters of King’s November 2001 public offering as defendants. The Company and other defendants filed motions to dismiss the consolidated amended complaint.

The Company has estimated a probable loss contingency for the class action lawsuit described above. The Company believes this loss contingency will be paid on behalf of the Company by its insurance carriers. Accordingly, as of December 31, 2005, the Company has recorded a liability and a receivable for this amount, classified in accrued expenses and prepaid and other current assets, respectively in the accompanying consolidated financial statements.

Beginning in March 2003, four purported shareholder derivative complaints were also filed in Tennessee state court alleging a breach of fiduciary duty, among other things, by some of the Company’s current and former officers and directors, with respect to the same events at issue in the federal securities litigation described above. These cases have been consolidated, and on October 3, 2003, plaintiffs filed a consolidated amended complaint. On November 17, 2003, defendants filed a motion to dismiss or stay the consolidated amended complaint. The court denied the motion to dismiss, but granted a stay of proceedings. On October 11, 2004, the court lifted the stay to permit plaintiffs to file a further amended complaint adding class action claims related to the Company’s then-anticipated merger with Mylan Laboratories, Inc. On October 26, 2004, defendants filed a partial answer to the further amended complaint, and moved to dismiss the newly-added claims. Following the termination of the Mylan merger agreement, plaintiffs voluntarily dismissed these claims. Discovery with respect to the remaining claims in the case has commenced. No trial date has been set.

Additionally, a class action complaint was filed in the United States District Court for the Eastern District of Tennessee under the Employee Retirement Income Security Act (“ERISA”). As amended, the complaint alleges that the Company and certain of its executive officers, former executive officers, directors, former directors and an employee of the Company violated fiduciary duties that they allegedly owed the Company’s 401(k) Retirement Savings Plan’s participants and beneficiaries under ERISA. The allegations underlying this action are similar in many respects to those in the class action litigation described above. The defendants filed a motion to dismiss the ERISA action on March 5, 2004. The District Court Judge referred the motion to a Magistrate Judge for a report and recommendation. On December 8, 2004, the Magistrate Judge held a hearing on this motion, and, on December 10, 2004, he recommended that the District Court Judge dismiss the action. The District Court Judge accepted the recommendation and dismissed the case on February 4, 2005. The plaintiffs have not appealed this decision, and the deadline for filing any appeal has now passed.

The Company is unable currently to predict the outcome or reasonably estimate the range of potential loss, if any, except as noted above, in the pending litigation. If the Company were not to prevail in the pending litigation, or if any governmental sanctions are imposed in excess of those described above, neither of which it can predict or reasonably estimate at this time, its business, financial condition, results of operations and cash flows could be materially adversely affected. Responding to the government investigations and defending the Company in the pending litigation has resulted, and is expected to continue to result, in a significant diversion of management’s attention and resources and the payment of additional professional fees.

The Rochester facility was one of six facilities owned by Pfizer subject to a Consent Decree of Permanent Injunction issued August 1993 in United States of America v. Warner-Lambert Company and Melvin R. Goodes and Lodewijk J.R. DeVink (U.S. Dist. Ct., Dist. of N.J.) (the “Consent Decree”). The Company acquired the Rochester facility in February 1998. In July 2005, the Court lifted the Consent Decree as it pertained to the Rochester facility. Accordingly, the Rochester facility is no longer subject to a consent decree.

Cobalt Pharmaceuticals, Inc. (“Cobalt”), a generic drug manufacturer located in Mississauga, Ontario, Canada, filed an Abbreviated New Drug Application (“ANDA”) with the U.S. Food and Drug Administration (the “FDA”) seeking permission to market a generic version of Altace^®. The following U.S. patents are listed for Altace^® in the FDA’s Approved Drug Products With Therapeutic Equivalence Evaluations (the “Orange Book”): U.S. Patent Nos. 4,587,258 (the “ ’258 patent”) and 5,061,722 (the “ ’722 patent”), two composition of matter patents related to Altace^®, and U.S. Patent No. 5,403,856 (the “ ’856 patent”), a method-of-use patent related to Altace^®, with expiration dates of January 2005, October 2008, and April 2012, respectively. Under the federal Hatch-Waxman Act of 1984, any generic manufacturer may file an ANDA with a certification (a “Paragraph IV certification”) challenging the validity or infringement of a patent listed in the FDA’s Orange Book four years after the pioneer company obtains approval of its New Drug Application (“NDA”). Cobalt filed a Paragraph IV certification alleging invalidity of the ’722 patent, and Aventis Pharma Deutschland GmbH (“Aventis”) and the Company filed suit on March 14, 2003 in the District Court for the District of Massachusetts to enforce its rights under that patent. Pursuant to the Hatch-Waxman Act, the filing of that suit provided the Company an automatic stay of FDA approval of Cobalt’s ANDA for 30 months from no earlier than February 5, 2003. That 30 month stay expired in August 2005 and on October 24, 2005, the FDA granted final approval of Cobalt’s ANDA. In March 2004, Cobalt stipulated to infringement of the ’722 patent. Subsequent to filing

its original complaint, the Company amended its complaint to add an allegation of infringement of the ’856 patent. The ’856 patent covers one of Altace^®’s three indications for use. In response to the amended complaint, Cobalt informed the FDA that it no longer seeks approval to market its proposed product for the indication covered by the ’856 patent. On this basis, the court granted Cobalt summary judgment of non-infringement of the ’856 patent. The court’s decision does not affect Cobalt’s infringement of the ’722 patent. On February 27, 2006, the Company, Aventis and Cobalt agreed that, subject to certain conditions, within 38 days, all parties will submit a joint stipulation dismissing without prejudice the litigation before the U.S. District Court of Massachusetts.

Lupin Ltd. (“Lupin”) filed an ANDA with the FDA seeking permission to market a generic version of Altace^® (“Lupin’s ANDA”). In addition to its ANDA, Lupin filed a Paragraph IV certification challenging the validity and infringement of the ’722 patent, and seeking to market its generic version of Altace^® before expiration of the ’722 patent. In July 2005, the Company filed civil actions for infringement of the ’722 patent against Lupin in the U.S. District Courts for the District of Maryland and the Eastern District of Virginia. Pursuant to the Hatch-Waxman Act, the filing of the suit against Lupin provides the Company with an automatic stay of FDA approval of Lupin’s ANDA for up to 30 months from no earlier than June 8, 2005. On February 1, 2006, the Maryland and Virginia cases were consolidated into a single action in the Eastern District of Virginia. Trial is currently scheduled to begin in that action on June 6, 2006.

The Company intends to vigorously enforce its rights under the ’722 and ’856 patents. If a generic version of Altace^® enters the market, the Company’s business, financial condition, results of operations and cash flows could be materially adversely affected. As of December 31, 2005, the Company had net intangible assets related to Altace^® of $239,502. If a generic version of Altace^® enters the market, the Company may have to write off a portion or all of the intangible assets associated with this product.

Eon Labs, Inc. (“Eon Labs”), CorePharma, LLC (“CorePharma”) and Mutual Pharmaceutical Co., Inc. (“Mutual”) have each filed an ANDA with the FDA seeking permission to market a generic version of Skelaxin^® 400 mg tablets. Additionally, Eon Labs’ ANDA seeks permission to market a generic version of Skelaxin^® 800 mg tablets. United States Patent Nos. 6,407,128 (the ’128 patent) and 6,683,102 (the ’102 patent), two method-of-use patents relating to Skelaxin^®, are listed in the FDA’s Orange Book and do not expire until December 3, 2021. Eon Labs and CorePharma have each filed Paragraph IV certifications against the ’128 and ’102 patents alleging noninfringement and invalidity of those patents. Mutual has filed a Paragraph IV certification against the ’102 patent alleging noninfringement and invalidity of that patent. A patent infringement suit was filed against Eon Labs on January 2, 2003 in the District Court for the Eastern District of New York; against CorePharma on March 7, 2003 in the District Court for the District of New Jersey (subsequently transferred to the District Court for the Eastern District of New York); and against Mutual on March 12, 2004 in the District Court for the Eastern District of Pennsylvania concerning their proposed 400 mg products. Additionally, the Company filed a separate suit against Eon Labs on December 17, 2004 in the District Court for the Eastern District of New York, concerning its proposed 800 mg product. Pursuant to the Hatch-Waxman Act, the filing of the suit against CorePharma provided the Company with an automatic stay of FDA approval of CorePharma’s ANDA for 30 months from no earlier than January 24, 2003. Also pursuant to the Hatch-Waxman Act, the filing of the suits against Eon Labs provided the Company with an automatic stay of FDA approval of Eon Labs’ ANDA for its proposed 400 mg and 800 mg products for 30 months from no earlier than November 18, 2002 and November 3, 2004, respectively. The Company intends to vigorously enforce its rights under the ’128 and ’102 patents to the full extent of the law.

capricious, and inconsistent with the FDA’s previous position on this issue. The Company filed a Citizen Petition on March 18, 2004 (supplemented on April 15, 2004 and on July 21, 2004), requesting the FDA to rescind that letter, require generic applicants to submit Paragraph IV certifications for the ’128 patent, and prohibit the removal of information corresponding to the use listed in the Orange Book. King concurrently filed a Petition for Stay of Action requesting the FDA to stay approval of any generic metaxalone products until the FDA has fully evaluated the Company’s Citizen Petition.

On March 12, 2004, the FDA sent a letter to the Company explaining that King’s proposed labeling revision for Skelaxin^®, which includes references to additional clinical studies relating to food, age, and gender effects, was approvable and only required certain formatting changes. On April 5, 2004, the Company submitted amended labeling text that incorporated those changes. On April 5, 2004, Mutual filed a Petition for Stay of Action requesting the FDA to stay approval of the Company’s proposed labeling revision until the FDA has fully evaluated and ruled upon the Company’s Citizen Petition, as well as all comments submitted in response to that petition. Discussions with the FDA concerning appropriate labeling are ongoing. The Company, CorePharma and Mutual have filed responses and supplements to the pending Citizen Petition.

If the Company’s Citizen Petition is rejected, there is a substantial likelihood that a generic version of Skelaxin^® will enter the market, and the Company’s business, financial condition, results of operations and cash flows could be materially adversely affected. As of December 31, 2005, the Company had net intangible assets related to Skelaxin^® of $170,384. If demand for Skelaxin^® declines below current expectations, the Company may have to write off a portion or all of these intangible assets.

Barr Laboratories Inc. (“Barr”) filed an ANDA, which included a Paragraph IV certification, with the FDA seeking permission to market a generic version of Prefest^®. United States Patent No. 5,108,995 (the “ ’995 patent”), a utility patent with method of treatment claims relating to Prefest^®, and United States Patent No. 5,382,573 (the “ ’573 patent”), a utility patent with pharmaceutical preparation claims relating to Prefest^®, were issued on April 28, 1992, and January 17, 1995, respectively. The ’995 patent and the ’573 patent are both listed in the FDA’s Orange Book. The ’995 patent does not expire until April 28, 2009, and the ’573 patent does not expire until January 17, 2012. On October 15, 2003, the Company received notice of Barr’s Paragraph IV certification, which alleges noninfringement and invalidity of the ’995 patent and the “573 patent. On November 26, 2003, the Company filed a Complaint against Barr in the Southern District of New York for infringement of the ’995 and ’573 patents. Pursuant to the Hatch-Waxman Act, the filing of that suit provided the Company an automatic stay of FDA approval of Barr’s ANDA for 30 months from no earlier than October 15, 2003. Subsequently, Barr purchased the rights to Prefest^® from the Company, and the lawsuit was dismissed on January 11, 2005 as a result of the transaction.

Sicor Pharmaceuticals, Inc. (“Sicor Pharma”), a generic drug manufacturer located in Irvine California, filed an ANDA with the FDA seeking permission to market a generic version of Adenoscan^®. U.S. Patent No. 5,070,877 (the “ ’877 patent”) is assigned to King and listed in the FDA’s Orange Book entry for Adenoscan^®. Astellas Pharma US, Inc. (“Astellas”) is the exclusive licensee of certain rights under the ’877 and has marketed Adenoscan^® in the U.S. since 1995. A substantial portion of the Company’s revenues from its royalties segment is derived from Astellas based on its net sales of Adenoscan^®. Sicor Pharma has filed a Paragraph IV certification alleging invalidity of the ’877 patent and non-infringement of certain claims of the ’877 patent. King and Astellas filed suit against Sicor Pharma and its parents/affiliates Sicor, Inc., Teva Pharmaceuticals USA, Inc. (“Teva”) and Teva Pharmaceutical

Industries, Ltd., on May 26, 2005, in the United States District Court for the District of Delaware to enforce their rights under the ’877 patent. Pursuant to the Hatch-Waxman Act, the filing of that suit provides the Company an automatic stay of FDA approval of Sicor Pharma’s ANDA for 30 months from no earlier than April 16, 2005. The Company intends to vigorously enforce its rights under the ’877 patent. If a generic version of Adenoscan^® enters the market, the Company’s business, financial condition, results of operations and cash flows could be materially adversely affected.

Teva filed an ANDA with the FDA seeking permission to market a generic version of Sonata^®. In addition to its ANDA, Teva filed a Paragraph IV certification challenging the enforceability of U.S. Patent 4,626,538 (the “ ’538 patent”) listed in the Orange Book which expires in June 2008. King filed suit against Teva in the United States District Court for the District of New Jersey to enforce its rights under the ’538 patent. Pursuant to the Hatch-Waxman Act, the filing of that suit provides the Company an automatic stay of FDA approval of Teva’s ANDA for 30 months from no earlier than June 21, 2005. The Company intends to vigorously enforce its rights under the ’538 patent. As of December 31, 2005, the Company had net intangible assets related to Sonata^® of $12,883. If a generic form of Sonata^® enters the market, the Company’s business, financial condition, results of operations and cash flows could be materially adversely affected.

The Company has a supply agreement with a third party to produce ramipril, the active ingredient in Altace^®. This supply agreement is reflected in the unconditional purchase obligations above. This supply agreement requires the Company to purchase certain minimum levels of ramipril as long as the Company maintains market exclusivity on Altace^® in the United States, and thereafter the parties must negotiate in good faith the annual minimum purchase quantities. If sales of Altace^® do not increase, if the Company is unable to maintain market exclusivity for Altace^® in accordance with current expectations, if the Company’s product life cycle management is not successful, or if the supply agreement or the annual minimum purchase requirements do not terminate at an optimal time, the Company may incur losses in connection with the purchase commitments under the supply agreement. In the event the Company incurs losses in connection with the purchase commitments under the supply agreement, there may be a material adverse effect upon the Company’s results of operations and cash flows.

The Company had a supply agreement with Eli Lilly to produce Lorabid^® which required the Company to purchase certain minimum levels of inventory of Lorabid^® through September 1, 2005. Based on changes in estimated prescription trends, the Company anticipated the minimum purchase commitments under the supply agreement would be greater than that which the Company would be able to sell to its customers. As a result, the Company recorded income of $482 during 2005 and charges of $4,483 and $29,959 during 2004 and 2003, respectively, related to the liability associated with the amount of its purchase commitments in excess of expected demand.

The Company’s business is classified into five reportable segments: branded pharmaceuticals, Meridian Medical Technologies, royalties, contract manufacturing and all other. Branded pharmaceuticals include a variety of branded prescription products that are separately categorized into four therapeutic areas, including cardiovascular/metabolic, neuroscience, hospital/acute care, and other. These branded prescription products are aggregated because of the similarity in regulatory environment, manufacturing processes, methods of distribution, and types of customer. Meridian develops, manufactures, and sells pharmaceutical products that are administered with an auto-injector to both commercial and government markets. The principal source of revenues in the commercial market is the EpiPen^® product line marketed by Dey, L.P., an epinephrine filled auto-injector, which is primarily prescribed for the treatment of severe allergic reactions. Government revenues are principally derived from the sale of nerve agent antidotes and other emergency medicine auto-injector products marketed to the U.S. Department of Defense and other federal, state and local agencies, particularly those involved in homeland security, as well as to approved foreign governments. Contract manufacturing primarily includes pharmaceutical manufacturing services the Company provides to third-party pharmaceutical and biotechnology companies. Royalties include revenues the Company derives from pharmaceutical products after the Company has transferred the manufacturing or marketing rights to third parties in exchange for licensing fees or royalty payments.

The Company primarily evaluates its segments based on gross profit. Reportable segments were separately identified based on revenues, segment profit (excluding depreciation) and total assets. Revenues among the segments are presented in the individual segments and removed through eliminations in the information below. Substantially all of the eliminations relate to sales from the contract manufacturing segment to the branded pharmaceuticals segment. The Company’s revenues are substantially all derived from activities within the United States and Puerto Rico. The Company’s assets are substantially all located within the United States and Puerto Rico.

The Company donated inventory with a carrying value of $16,322 in 2003 and $1,452 in 2004 to the Benevolent Fund. The Benevolent Fund is a nonprofit corporation organized under the laws of the Commonwealth of Virginia and is exempt from taxation under Section 501(c)(3) of the Internal Revenue Code. The Benevolent Fund obtains pharmaceutical products either as gifts-in-kind from manufacturers or by purchase from third-party distributors or wholesalers. The Benevolent Fund donates the pharmaceutical products purchased or received as gifts-in-kind to medical missions in the United States and in foreign countries to advance its humanitarian aid efforts. Jefferson J. Gregory served as the Company’s Chief Executive Officer and Chairman of the Board until May 14, 2004. John M. Gregory and Mary Ann Blessing, brother and sister of Jefferson J. Gregory, serve as President of the Board of Directors of the Benevolent Fund and Treasurer of the Board of Directors of the Benevolent Fund, respectively.

On December 26, 2002, the Company sold $4,701 of Cortisporin^®, Silvadene^® and Tigan^® to a third-party wholesaler, which in turn resold those products to the Benevolent Fund in January 2003. The Company recognized revenue associated with this transaction as the Benevolent Fund distributed the products to the beneficiaries of the Benevolent Fund’s charitable donations. During 2003, the Company recognized $4,270 of the deferred revenue. The remainder was recognized in 2004.

The Company periodically makes contributions to charitable and not-for-profit organizations in communities where its facilities are located. In April 2004, the Company made a three-year pledge totaling $900 to Sullins Academy, a private school offering education in grades K-8. The Company recorded the pledge during the second quarter of 2004. During the fourth quarter of 2003 and the first quarter of 2004, the Company made a contribution to Sullins Academy of $150. At certain times during this period, children of some Company employees, including the Company’s former Chief Executive Officer and the former President, attended Sullins Academy, and the former President and the spouse of the former Chief Executive Officer served as volunteer members of the Sullins Academy board of directors.

The Company has various incentive stock plans for executives and employees. In connection with the plans, options to purchase common stock are granted at option prices not less than the fair market values of the common stock at the time the options are granted and either vest immediately or ratably over a designated period. Restricted stock grants generally vest at the end of a three year period, but may vest over other designated periods as determined by the Company. As of December 31, 2005, 34,274,018 shares of common stock are available for future grant. The Company granted 690,692 shares of restricted stock during 2005 with a weighted average grant date fair value of $15.55. During 2005, the Company recognized expense of $1,978 related to restricted stock.

During 2005, 2004 and 2003, the Company granted 70,000, 81,698 and 70,000 options, respectively, of common stock to its non-employee directors under the 1998 King Pharmaceuticals, Inc. Non-Employee Director Stock Option Plan (“1998 Stock Option Plan”) at an exercise price equal to market value at the date of grant. The options vested after one year of service for the 2005, 2004 and 2003 grants. Options totaling 331,830 issued under the 1998 Stock Option Plan were outstanding at December 31, 2005 of which 261,830 were fully vested. Options under the 1998 Stock Option Plan expire 10 years from the date of grant. These options are included in amounts reflected in the above tables.

For the year ended December 31, 2004, options to purchase 444,990 shares of common stock were not included in the computation of diluted earnings (loss) per share because their inclusion would have been anti-dilutive and would have reduced the loss per share. In addition, the weighted average stock options that were anti-dilutive at December 31, 2005, 2004 and 2003 were 5,469,722, 5,895,970 and 3,034,318 shares, respectively. The convertible debentures could also be converted into 6,877,990 shares of common stock in the future, subject to certain contingencies outlined in the indenture (Note 14). Because the convertible debentures are anti-dilutive, they were not included in the calculation of diluted income per common share.

In December 2004, the FASB issued SFAS No. 123(R), “Share-based Payment” that requires the Company to expense costs related to share-based payment transactions with employees. The SEC has issued an Amendment to Rule 4-01(a) of Regulation S-X, changing the compliance date for SFAS 123(R) to the first annual reporting period beginning on or after June 15, 2005. SFAS No. 123(R) becomes mandatorily effective on January 1, 2006. Accordingly, the Company will adopt SFAS 123(R) in the first quarter of 2006. See Note 2 for the pro-forma effect on net income and earnings per share of applying SFAS 123.

In November 2004, the FASB issued SFAS No. 151, (Inventory Costs), an amendment of ARB No. 43. SFAS No. 151 requires certain abnormal expenditures to be recognized as expenses in the current period. It also requires that the amount of fixed production overhead allocated to inventory be based on the normal capacity of the production facilities. The standard is effective for the fiscal year beginning January 1, 2006. The Company is currently evaluating the effect that SFAS No. 151 will have on the Company’s financial reporting.

During 2004 the Company incurred restructuring charges as a result of separation agreements with several executives, the relocation of the Company’s sales and marketing operations from Bristol, Tennessee to Princeton, New Jersey, the termination of the women’s health sales force, and the decision to end principal operations of a small subsidiary of Meridian Medical Technologies located in Northern Ireland. A summary of the types of costs accrued and incurred are summarized below:

Research, referred to as the Women’s Health Initiative, was conducted by the National Institutes of Health. Data from the trial released in July 2002 indicated that an increase in certain health risks may result from the long-term use of a competitor’s combination hormone replacement therapy for women. News of this data and the perception it has created have negatively affected the entire combination hormone therapy and the oral estrogen therapy markets including certain of the Company’s products. Prescriptions for some of the Company’s other women’s health products have also continued to decline over the past few years primarily due to the availability of generics. On March 30, 2004, the Company’s Board of Directors approved management’s decision to market for divestiture many of the Company’s women’s health products. On November 22, 2004 the Company sold all of its rights in Prefest^® for approximately $15,000. On December 23, 2004, the Company sold all of its rights in Nordette^® for approximately $12,000.

The Prefest^® and Nordette^® product rights, which the Company divested on November 22, 2004 and December 23, 2004, respectively, had identifiable cash flows that were largely independent of the cash flows of other groups of assets and liabilities and are classified as discontinued operations in the accompanying financial statements. Prefest^® and Nordette^® formerly were included in the Company’s branded pharmaceuticals segment. During the first and third quarters of 2004, the Company wrote down intangible assets by the amount of $169,591 and $5,734, respectively, to reduce the carrying value of the intangible assets associated with these products to their estimated fair value less costs to sell. The Company determined the fair value of these assets based on management’s discounted cash flow projections for the products less expected selling costs.

On July 26, 2004, the Company entered into a merger agreement with Mylan Laboratories Inc. and a wholly owned subsidiary of Mylan, pursuant to which Mylan agreed to acquire King in a stock-for-stock transaction. On February 27, 2005, Mylan and King announced they had mutually agreed to terminate that agreement. As of March 1, 2005 both Mylan and King would have had a right to terminate the merger agreement and following discussions, the companies were not able to agree on terms for a revised transaction.

In February, the Company entered into a collaboration with Arrow International Limited and certain of its affiliates (collectively, “Arrow”) to commercialize novel formulations of ramipril, the active ingredient in our Altace^® product. Under a series of agreements, Arrow has granted King rights to certain current and future New Drug Applications (“NDAs”) regarding novel formulations of ramipril and intellectual property, including patent rights and technology licenses relating to these novel formulations. Under certain conditions, Arrow will be responsible for the manufacture and supply of new formulations of ramipril for King. Additionally, the Company has granted Cobalt Pharmaceuticals, Inc. a non-exclusive right to enter into the U.S. ramipril market with a generic of the currently marketed Altace^® product, formulation of ramipril, which would be supplied by King. Cobalt is an affiliate of Arrow, but is not a party to the collaboration.

under the Company’s financing arrangements on the ability of the Guarantor Subsidiaries to distribute funds to the Company in the form of cash dividends, loans or advances. The following combined financial data provides information regarding the financial position, results of operations and cash flows of the Guarantor Subsidiaries (condensed consolidating financial data). Separate financial statements and other disclosures concerning the Guarantor Subsidiaries are not presented because management has determined that such information would not be material to the holders of the debt.

[Continued from above table, first column(s) repeated]


		December 31, 2004

				Guarantor			Non Guarantor		Eliminating			King
		King		Subsidiaries			Subsidiaries		Entries			Consolidated

ASSETS
Current assets:
Cash and cash equivalents		$	164,451	$	27,035		$	1,170	$	—		$	192,656
Investments in debt securities			149,430		—			—		—			149,430
Restricted cash			66,543		31,187			—		—			97,730
Marketable securities			16,498		—			—		—			16,498
Accounts receivable, net			3,344		174,797			2,822		—			180,963
Inventories			237,448		36,743			221		—			274,412
Deferred income tax assets			32,809		121,170			—		—			153,979
Prepaid expenses and other current assets			22,846		38,481			68		—			61,395

	Total current assets		693,369		429,413			4,281		—			1,127,063
Property, plant, and equipment, net			112,416		168,313			2		—			280,731
Goodwill			—		121,152			—		—			121,152
Intangible assets, net			194		1,275,474			10,293		—			1,285,961
Marketable securities			—		—			—		—			—
Other assets			16,078		240			—		—			16,318
Deferred income tax assets			14,197		78,734			—		—			92,931
Investment in subsidiaries			2,186,234		—			—		(2,186,234	)		—

	Total assets	$	3,022,488	$	2,073,326		$	14,576	$	(2,186,234	)	$	2,924,156

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	61,427	$	31,339		$	154	$	—		$	92,920
Accrued expenses			125,095		470,899			16		—			596,010
Income taxes payable			—		—			—		—			—
Current portion of long-term debt			—		—			—		—			—

	Total current liabilities		186,522		502,238			170		—			688,930
Long-term debt			345,000		—			—		—			345,000
Other liabilities			29,417		12,019			—		—			41,436
Intercompany payable (receivable)			612,759		(620,511	)		7,752		—			—

	Total liabilities		1,173,698		(106,254	)		7,922		—			1,075,366

Shareholders’ equity			1,848,790		2,179,580			6,654		(2,186,234	)		1,848,790

	Total liabilities and shareholders’ equity	$	3,022,488	$	2,073,326		$	14,576	$	(2,186,234	)	$	2,924,156

[Continued from above table, first column(s) repeated]


			Twelve Months Ended 12/31/2004

									Non
						Guarantor			Guarantor						King
			King			Subsidiaries			Subsidiaries			Eliminations			Consolidated

Revenues:
	Net sales		$	374,833		$	1,222,515		$	2,030		$	(373,488	)	$	1,225,890
	Royalty revenue			—			78,474			—			—			78,474

		Total revenues		374,833			1,300,989			2,030			(373,488	)		1,304,364

Operating costs and expenses:
	Cost of revenues			135,430			590,388			608			(373,488	)		352,938
	Selling, general and administrative			264,024			330,434			983			—			595,441
	Research and development			509			83,730			—			—			84,239
	Depreciation and amortization			16,925			144,722			468			—			162,115
	Intangible asset impairment			4,399			145,193			—			—			149,592
	Restructuring charges			7,646			3,181			—			—			10,827
	Gain on sale of intangible assets			(4,022	)		(5,502	)		—			—			(9,524	)

		Total operating costs and expenses		424,911			1,292,146			2,059			(373,488	)		1,345,628

Operating income				(50,078	)		8,843			(29	)		—			(41,264	)
Other income (expense):
	Interest income			5,101			873			—			—			5,974
	Interest expense			(12,492	)		(96	)		—			—			(12,588	)
	Valuation (charge) benefit — convertible notes receivable			(2,887	)		—			—			—			(2,887	)
	Loss on investment			(6,520	)		—			—			—			(6,520	)
	Other, net			(820	)		(82	)		153			—			(749	)
	Equity in earnings (loss) of subsidiaries			(84,284	)		—			—			84,284			—
	Intercompany interest (expense) income			(33,648	)		33,937			(289	)		—			—

		Total other income (expenses)		(135,550	)		34,632			(136	)		84,284			(16,770	)

Income (loss) from continuing operations before income taxes				(185,628	)		43,475			(165	)		84,284			(58,034	)

Income tax expense (benefit)				(25,315	)		18,026			(123	)		—			(7,412	)

Income (loss) from continuing operations				(160,313	)		25,449			(42	)		84,284			(50,622	)
Discontinued operations:
	Income (loss) from discontinued operations			40			(172,790	)		—			—			(172,750	)
	Income tax expense (benefit)			15			(63,099	)		—			—			(63,084	)

	Total income (loss) from discontinued operations			25			(109,691	)		—			—			(109,666	)

		Net income (loss)	$	(160,288	)	$	(84,242	)	$	(42	)	$	84,284		$	(160,288	)

[Continued from above table, first column(s) repeated]


			Twelve Months Ended 12/31/2003

									Non
						Guarantor			Guarantor					King
			King			Subsidiaries			Subsidiaries		Eliminations			Consolidated

Revenues:
	Net sales		$	329,974		$	1,420,875		$	3,056	$	(329,481	)	$	1,424,424
	Royalty revenue			—			68,365			—		—			68,365

		Total revenues		329,974			1,489,240			3,056		(329,481	)		1,492,789

Operating costs and expenses:
	Cost of revenues			145,930			568,510			882		(329,481	)		385,841
	Selling, general and administrative			64,489			425,987			106		—			490,582
	Research and development			900			237,178			—		—			238,078
	Depreciation and amortization			8,013			105,308			424		—			113,745
	Intangible asset impairment			7,425			117,191			—		—			124,616
	Restructuring charges			—			—			—		—			—
	Gain on sale of intangible assets			—			(12,025	)		—		—			(12,025	)

		Total operating costs and expenses		226,757			1,442,149			1,412		(329,481	)		1,340,837

Operating income				103,217			47,091			1,644		—			151,952
Other income (expense):
	Interest income			5,960			889			—		—			6,849
	Interest expense			(13,391	)		(5	)		—		—			(13,396	)
	Valuation (charge) benefit — convertible notes receivable			18,551			—			—		—			18,551
	Loss on investment			—			—			—		—			—
	Other, net			(650	)		(149	)		170		—			(629	)
	Equity in earnings (loss) of subsidiaries			46,830			—			—		(46,830	)		—
	Intercompany interest (expense) income			(9,567	)		9,567			—		—			—

		Total other income (expenses)		47,733			10,302			170		(46,830	)		11,375

Income (loss) from continuing operations before income taxes				150,950			57,393			1,814		(46,830	)		163,327

Income tax expense (benefit)				58,996			6,253			635		—			65,884

Income (loss) from continuing operations				91,954			51,140			1,179		(46,830	)		97,443
Discontinued operations:
	Income (loss) from discontinued operations			—			(8,771	)		—		—			(8,771	)
	Income tax expense (benefit)			—			(3,282	)		—		—			(3,282	)

	Total income (loss) from discontinued operations			—			(5,489	)		—		—			(5,489	)

		Net income (loss)	$	91,954		$	45,651		$	1,179	$	(46,830	)	$	91,954

S-1 EX-10.33 2 g99351exv10w33.txt EX-10.33 WAIVER AGREEMENT - JOHN A. A. BELLAMY EXHIBIT 10.33 KING PHARMACEUTICALS, INC. SEVERANCE PAY PLAN: TIER I WAIVER, RELEASE AND NON-SOLICITATION, NONCOMPETE AND NONDISCLOSURE AGREEMENT 1. In consideration for the Severance Pay and/or Severance Benefits to be provided to me under the terms of the King Pharmaceuticals, Inc. Severance Pay Plan: Tier I ('Plan'), and after having had a full, unhurried opportunity to consult with an attorney of my choice with respect to this Agreement, including its consent and final binding effect, I, on behalf of myself and my heirs, executors, administrators, attorneys and assigns, hereby waive, release and forever discharge King Pharmaceuticals, Inc. (hereinafter referred to as the "Company") and its parent (if any), subsidiaries, divisions and Affiliates (as defined in the Plan), whether direct or indirect, its and their joint ventures and joint venturers (including its and their respective directors, officers, employees, shareholders, partners and agents, past, present, and future), and each of its and their respective successors and assigns (hereinafter collectively referred to as "Releasees"), from any and all known or unknown demands, damages, actions, causes of action, claims, losses, or liabilities of any kind which have or could be asserted against the Releasees arising out of or related to my employment with and/or the Separation of my employment with the Company and/or any of the other Releasees and/or any other occurrence from the beginning of time up to and including the date of this Agreement, including but not limited to: (a) All claims, actions, causes of action or liabilities arising under Title VII of the Civil Rights Act of 1964, as amended, the Age Discrimination in Employment Act, as amended, the Employee Retirement Income Security Act, as amended, the Rehabilitation Act of 1973, as amended, the Americans with Disabilities Act, as amended, the Family and Medical Leave Act, as amended, and/or any other federal, state, municipal, or local employment discrimination statutes (including, but not limited to, claims based on age, sex, attainment of benefit plan rights, race, religion, national origin, marital status, sexual orientation, ancestry, harassment, parental status, handicap, disability, retaliation, and veteran status); and/or (b) All claims, actions, causes of action or liabilities arising under any other federal, state, municipal, or local statute, law, ordinance or regulation; and/or (c) Any and all other claims whatsoever including, but not limited to, claims for severance pay, claims based upon breach of contract, wrongful Separation, retaliatory discharge, defamation, intentional infliction of emotional distress, tort, personal injury, invasion of privacy, violation of public policy, negligence and/or any other common law, statutory or other claim whatsoever arising out of or relating to my employment with and/or the Separation of my employment with the Company and/or any of the other Releasees. 2. I also agree never to sue any of the Releasees or become party to a lawsuit on the basis of any claim of any type whatsoever arising out of or related to my employment with and/or the Separation of my employment with the Company and/or any of the other Releasees. I further agree not to make any public statement or statements, to the press or otherwise, concerning the Company's Board of Directors, management, business objectives, status of its securities, its management practices, products, or other sensitive information, without first receiving the written consent of the Company's Executive Vice President of Human Resources and its Chief Executive Officer, and I will not take any action which would cause the Company, or its employees or agents, embarrassment or humiliation or otherwise cause or contribute to the Company, or any such person, being held in disrepute by the general public or the Company's employees, clients, or customers. 3. I further acknowledge and agree in the event that I breach the provisions of paragraph 2 above and/or the Non-Solicitation, Non-Compete or Nondisclosure provisions of the Plan, (a) the Company shall not be obligated to continue payment of the Severance Pay, and the availability of Severance Benefits to me, (b) I shall be obligated to repay to the Company upon written demand ninety percent (90%) of the amount of Severance Pay and cost of the Severance Benefits paid or provided to me, plus simple interest at the rate often percent (10%) per annum from the date of payment of such pay and/or benefits, and (c) I shall be obligated to pay the Company its costs and expenses in enforcing the provisions of this Agreement and the Plan (including court costs, expenses and reasonable legal fees), and the foregoing shall not affect the validity of this Agreement and shall not be deemed a penalty or a forfeiture. In the event I breach the notice requirements of Section 4(b) of the Plan regarding eligibility for alternate welfare plan coverage after a Qualifying Separation, I understand and agree that the provisions of the prior sentence shall apply, but solely with respect to the Severance Benefits for which such required notice was not timely provided. Executive specifically acknowledges that the restrictions, prohibitions, and other provisions of this paragraph and the Non-Solicitation, Non-Compete and Nondisclosure restrictions of the Plan are reasonable, fair, and equitable in scope, terms, and duration, and are a material inducement to the Company to provide the benefits described in the Plan. Executive agrees that the obligations in this Agreement are necessary in order to protect the Company's legitimate business interests; its trade secrets and confidential information; its relationships with its customers and distributors; its investment in its employees; and its goodwill, in light of the nature and extent of the business conducted by the Company. Executive further agrees that upon any breach or threatened breach of these obligations, the Company shall be entitled to injunctive relief, both temporary and permanent, without the necessity of posting a bond, as well as, and in addition to, all other available remedies, including such damages as may be permitted by law, all of which shall be cumulative and not exclusive. 4. I further waive my right to any monetary recovery should any federal, state, or local administrative agency pursue any claims on my behalf arising out of or related to my employment with and/or separation from employment with the Company and/or any of the other Releasees. 5. I further waive, release, and discharge Releasees from any reinstatement rights which I have or could have and I acknowledge that I have not suffered any on-the- job injury for which I have not already filed a claim; and I hereby unconditionally agree that I shall not now or at any time in the future, either individually or through others, as an independent contractor or otherwise in any capacity, directly or indirectly, apply for or otherwise seek employment or any other arrangement with the Company and/or any of the other Releasees to provide services to or on behalf of any of the same, without the prior written consent of the Executive Vice President of Human Resources of the Company. 6. I acknowledge that I have been given at least forty-five (45) days to consider this Waiver and Release Agreement thoroughly and I was advised to consult with my personal attorney, if desired, before signing below. 7. I understand that I may revoke this Agreement within seven (7) days after its signing and that any revocation must be made in writing and submitted within such seven day period to the Plan Administrator. I further understand that if I revoke this Agreement, I shall not receive Severance Pay or Severance Benefits. 8. I FURTHER UNDERSTAND THAT THIS AGREEMENT INCLUDES A RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS. 9. I understand that nothing in this Agreement shall affect any obligation which the Company may have to indemnify me pursuant to Section 9 of the Company's charter or Article VII of the Company's bylaws. 10. I acknowledge and agree that this Agreement is given in exchange for consideration in addition to anything of value to which I am already entitled. 11. I acknowledge and agree that if any provision of this Agreement is found, held or deemed by a court of competent jurisdiction to be void, unlawful or unenforceable under any applicable statute or controlling law, the remainder of this Agreement shall continue in full force and effect. If any portion of this Agreement or the Plan relating to Non-Solicitation, Non-Compete or Nondisclosure is held by a court of competent jurisdiction to be unreasonable, unenforceable, arbitrary, or against public policy, then such portion shall be considered divisible as to time, geographical area, and prohibited activities, and the remaining provisions shall remain in effect, and the parties agree to reasonable modification, including but not limited to modifications as to time, geographical area, and prohibited activities, as the court shall decide in order to reflect the intent of the parties. 12. This Agreement is deemed made and entered into in the State of Tennessee, and in all respects shall be interpreted, enforced and governed under the internal laws of the State of Tennessee, to the extent not preempted by applicable federal law. Jurisdiction and venue over any dispute under this Agreement shall lie solely in the Law Court for Sullivan County, Tennessee, Bristol Division. 13. I further acknowledge and agree that I have carefully read and fully understand all of the provisions of this Agreement and that I voluntarily and knowingly enter into this Agreement by signing below. No modification of this Agreement shall be effective unless made in writing and signed by both Executive and the Company. 14. ACKNOWLEDGMENT OF COMPLIANCE Because this Agreement includes a release and waiver as to claims under the AGE DISCRIMINATION IN EMPLOYMENT ACT ("ADEA"), your signature below acknowledges that it complies with the Older Worker Benefit Protection Act ("OWBPA") of 1990 and further acknowledges that you confirm, understand, and agree to the terms and conditions of this Agreement; that these terms are written in lay person terms, and that you have been fully advised of your right to seek the advice and assistance of consultants, including an attorney, as well as tax advisors, to review this agreement. It also acknowledges that you do not waive any rights or claims under the ADEA that may arise after the date this Agreement is signed by you, and specifically, that under this Agreement, you are receiving consideration beyond anything of value to which you are already entitled. It is understood by you that you have been advised to consult with an attorney of your choice before signing. You also understand that you have up to forty-five (45) full days to consider whether to sign this release and agreement. By signing this release on the date shown below, you knowingly and voluntarily elect to forego waiting the portion then remaining of the forty-five (45) full days to consider whether to sign this release and agreement. 15. RIGHT OF REVOCATION Your signature also acknowledges that, in compliance with the OWBPA condition above, you have been fully advised by the Company of your right to revoke and nullify this release and agreement, which right must be exercised, if at all, within seven (7) days of the date of your signature. Any revocation of this Agreement must be in writing, addressed to the Company, to the attention of the Plan Administrator of the King Pharmaceuticals, Inc. Severance Pay Plan: Tier I, and the Company must be notified within the foregoing seven (7) day period. This Agreement will not become effective or enforceable until the expiration of the 7-day period. 16. BINDING EFFECT Upon signing this agreement, it will become effective and binding upon you and the Company and upon the respective successors, assigns, heirs and personal representatives as is discussed in paragraph 1 above. John Bellamy ------------------------------------------ Name of Eligible Executive -- Please Print /s/ John Bellamy ------------------------------------------ (Signature of Eligible Executive) 14 December 2005 ---------------------------------- (Date) PLEASE RETURN TO: Plan Administrator King Pharmaceuticals, Inc. Severance Pay Plan: Tier I EX-10.34 3 g99351exv10w34.txt EX-10.34 ADDENDUM TO THE WAIVER AGREEMENT Exhibit 10.34 ADDENDUM TO WAIVER, RELEASE AND NON-SOLICITATION, NONCOMPETE AND NONDISCLOSURE AGREEMENT In connection with the Waiver, Release and Non-Solicitation, Noncompete and Nondisclosure Agreement executed on December 14, 2005 by and between John A. A. Bellamy ("Mr. Bellamy") and King Pharmaceuticals, Inc. ("King"), King hereby agrees as follows: 1. Cooperation: If Mr. Bellamy is asked to cooperate with King pursuant to Section 22 of the King Pharmaceuticals, Inc. Severance Pay Plan: Tier I (Effective March 15, 2005) (the "Severance Plan"), King agrees that it will reimburse Mr. Bellamy for reasonable and necessary expenses incurred by Mr. Bellamy in fulfilling his obligations thereunder. 2. Severance Pay: Notwithstanding the provisions of Section 5 of the Severance Plan, King agrees that it will distribute the Severance Pay within ten (10) business days after the expiration of Mr. Bellamy's seven (7) day revocation period set forth in the Severance Plan. 3. Severance Benefits: Notwithstanding the provisions of Section 5 of the Severance Plan, King agrees to reimburse Mr. Bellamy within thirty (30) calendar days of his payment for coverage under King's welfare benefit plans. 4. Waiver Of Agreement Not To Compete: King hereby waives its right(s) to enforce against Mr. Bellamy the terms of sections 8(a)(i) and 8(c) of the Severance Plan; provided, however, that this waiver shall not apply if, within one year of the date hereof, Mr. Bellamy accepts any employment, whether as an owner, partner, director, officer, employee, agent, independent contractor, consultant, or in any other capacity, with any Person (as such term is defined in the Severance Plan) which, as of December 14, 2005, manufactures one or more products that compete directly with Altace or Thrombin, or that compete directly with products produced by King's Meridian franchise. 5. Letter of Reference: King agrees that it will provide to Mr. Bellamy a signed letter of reference in a form substantially similar to that attached hereto as "Exhibit A." 6. Indemnification: (a)(i) King shall indemnify, defend and hold harmless Mr. Bellamy, who has been a director or officer of King or any of its Subsidiaries, against all losses, claims, damages, costs and expenses (including reasonable attorneys' fees), liabilities, judgments and, subject to the proviso of this sentence, settlement amounts that are paid or incurred in connection with any claim, action, suit, proceeding or investigation (whether civil, criminal, administrative or investigative and whether asserted or claimed prior to, at or after the date of this Agreement) that is (A) based on, or arises out of, the fact that Mr. Bellamy is or was a director or officer of King or any of its Subsidiaries, or (B) based on, or arising out of, or pertaining to this Agreement or the transactions contemplated hereby, in each case to the fullest extent a corporation is permitted under applicable law to indemnify its own directors or officers, as the case may be; provided, however, that King shall not be liable for any settlement of any claim effected without its written consent (which consent shall not be unreasonably withheld). Without limiting the foregoing, in the event that any such claim, action, suit, proceeding or investigation is brought against Mr. Bellamy(whether arising prior to or after the Date of this Agreement), (w) King following the Date of this Agreement will pay all expenses of the disposition of any such claim, action, suit, proceeding or investigation to Mr. Bellamy to the full extent permitted by applicable law promptly after statements therefor are received and otherwise advance to Mr. Bellamy upon request reimbursement of documented expenses reasonably incurred, in either case to the extent not prohibited by the Tennessee Business Corporation Act (TBCA); provided, however, that the person to whom expenses are advanced provides any undertaking required by applicable law to repay such advance if it is ultimately determined that such person is not entitled to indemnification; (x) Mr. Bellamy shall retain counsel reasonably satisfactory to King; (y) King following the Date of this Agreement shall pay all reasonable fees and expenses of such counsel for Mr. Bellamy(subject to the penultimate sentence of this paragraph) and all costs and expenses of Mr. Bellamy in connection with seeking and obtaining indemnification from King, in each case promptly as statements therefor are received; and (z) King following the date of this Agreement shall use all commercially reasonable efforts to assist in the defense of any such matter. In the event of any dispute as to whether Executive's conduct complies with the standards set forth under the TBCA and King's Charter or King's By-laws, a determination shall be made by independent counsel mutually acceptable to King and Executive; provided, however, that King following the date of this Agreement shall not be liable for any settlement effected without its written consent (which consent shall not be unreasonably withheld). Without limiting the foregoing, to the extent that Mr. Bellamy is, by reason of the fact that Mr. Bellamy is or was a director or officer of King or any of its Subsidiaries, a witness in any claim, action, suit, proceeding or investigation to which Mr. Bellamy is not a party, Mr. Bellamy shall be indemnified and held harmless against all costs and expenses in connection therewith. (ii) King shall not enter into any settlement of any claim in which King is jointly liable with Mr. Bellamy(or would be if joined in such claim) unless such settlement provides for a full and final release of all claims asserted against Mr. Bellamy. (b) Except to the extent required by law, King following the date of this Agreement shall not take any action so as to amend, modify, limit or repeal the provisions for indemnification of Mr. Bellamy contained in the certificates or articles of incorporation or by-laws (or other comparable charter documents) of King and its Subsidiaries following the date of this Agreement in such a manner as would adversely affect the rights of Mr. Bellamy to be indemnified by such corporations in respect of his serving in such capacities prior thereto. King following the date of this Agreement shall honor all of its indemnification obligations to Mr. Bellamy existing as of said date and shall maintain in effect adequate directors' and officer's liability insurance with respect to such indemnification obligations. (c) The provisions of this Section are intended to be for the benefit of, and shall be enforceable by, Mr. Bellamy and his heirs and legal representatives, and shall be in addition to, and shall not impair, any other rights Mr. Bellamy may have under King's Charter, other organizational documents of King or any of its Subsidiaries, the TBCA or otherwise. KING PHARMACEUTICALS, INC. By: /s/ Brian A. Markison By: /s/ Earnest W. Deavenport, Jr. ----------------------------------- ------------------------------ Name: Name: Title: Chief Executive Officer Title: Director and Chairman of the Compensation and Human Resources Committee of the Board of Directors Date: December 20, 2005 Date: December 20, 2005 --------------------------------- ---------------------------- EX-10.35 4 g99351exv10w35.txt EX-10.35 COLLABORATION AGREEMENT - PAIN THERAPEUTICS, INC. EXHIBIT 10.35 EXECUTION COPY COLLABORATION AGREEMENT This COLLABORATION AGREEMENT is entered into as of November 9, 2005 (the "Effective Date"), by and between PAIN THERAPEUTICS, INC., a Delaware corporation having an address of 416 Browning Way, South San Francisco, California 94080 ("PTI"), and KING PHARMACEUTICALS, INC., a Tennessee corporation having an address of 501 Fifth Avenue, Bristol, Tennessee 37620 ("King"). Each of King and PTI is sometimes referred to individually herein as a "Party" and collectively as the "Parties." WHEREAS, PTI owns or controls certain technology and intellectual property rights relating to the preparation of tamper-resistant opioid formulations; WHEREAS, King is engaged in the development and marketing of human therapeutics; WHEREAS, King is entering into this Agreement based on, among other things, PTI's specialized skill, knowledge, and expertise with respect to the technology and intellectual property relating to the preparation of tamper-resistant opioid formulations; and WHEREAS, the Parties desire to enter into a collaboration for the purpose of Developing Remoxy and other Products and to give King the right to Market and manufacture Products, in each case, derived from PTI technology and intellectual property; NOW, THEREFORE, in consideration of the mutual covenants contained herein, and for other good and valuable consideration the receipt and sufficiency of which are acknowledged by the Parties, the Parties hereto, intending to be legally bound, agree as follows. 1. DEFINITIONS Capitalized words and phrases used in this Agreement have the meanings ascribed to such terms in Annex A attached hereto. 2. ADMINISTRATION OF THE COLLABORATION 2.1 ESTABLISHMENT AND FUNCTION OF JOC. PTI and King shall establish the JOC within thirty (30) days of the Closing Date, which shall have the responsibilities set forth in this Agreement, including Section 2.2. Each Party shall appoint, in its sole discretion, three members to the JOC (which members shall be employees of such Party), with those members designated primarily to represent such Party with respect to clinical/regulatory, sales/marketing/finance and manufacturing matters. King and PTI each shall designate a co-chairman (each a "Co-Chairman" and together the "Co-Chairmen"). Upon the approval of both Co-Chairmen (or the remaining Co-Chairman in the event of a substitution in that position), which approval shall not be unreasonably withheld, each Party may substitute individuals, on a permanent or temporary basis, for any of its previously designated representatives to the JOC, by giving written notice thereof to the other Party. PTI and King shall each bear all out-of-pocket expenses of their respective JOC members related to their participation on the JOC and attendance at JOC meetings. PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 2.2 JOC RESPONSIBILITIES. The JOC shall administer and monitor all matters with respect to the Collaboration, including the following matters: 2.2.1 oversight of the Development Plans and Manufacturing/CMC Plans, including all related strategy and objectives, timelines and activities thereunder, and changes with respect thereto on a quarterly basis; such oversight will confer to each Party, through its JOC representative, an ongoing right of Consultation; 2.2.2 review and approval of all budgets to support the Program Plans; 2.2.3 review of the management and allocation of resources of the Collaboration; 2.2.4 review of all Patent Rights and Technology used in connection with Product; 2.2.5 review and approval (prior to execution by either Party) of (a) all Third Party licenses (including all amendments thereto), and (b) all subcontracts, sublicenses, and other agreements (including all amendments thereto) that are required or to be entered into in connection with the Development Program and that either (i) require payments by a Party to a Third Party of greater than [***] U.S. dollars ($[***]) over the life of the contract or (ii) are otherwise material, or reasonably likely to become material, to the Collaboration, such review in each case to include a determination, with respect to each such subcontract, sublicense, license, or agreement, regarding whether it is appropriate to require the inclusion of the protections set forth in Section 3.8 hereof; and 2.2.6 performance of such other functions as appropriate to further the purposes of this Agreement and the Collaboration as determined from time to time by the Parties. 2.3 DISPUTE RESOLUTION. 2.3.1 In the event that the JOC shall not be able, within 10 days, to reach a decision or take an action on any matter, then such unresolved matter shall first be referred for resolution to the Chief Executive Officer of each Party for attempted resolution by good faith negotiation. Such good faith negotiation may include the appointment by either Party, at its own expense, of an unaffiliated Consultant, who shall be an expert chosen based on such person's experience and expertise in the particular type of issue that is unresolved to advise such officers on the matter. 2.3.2 If such officers are unable to resolve the matter within 10 days, then, except as provided in Section 3.4.6 or 3.9, and subject to Section 3.3.2: (a) the following matters shall be finally decided by PTI: (i) all matters related to the Development Plan in the U.S. Territory until immediately prior to the Phase II Meeting with respect to a Product (subject to Section 3.4.3); and (ii) all CMC matters relating to the Manufacturing/CMC Plan through the Regulatory Approval of an NDA for a Product; PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 2 (b) the following matters shall be finally decided by King: (i) all matters related to the Development Plan in the U.S. Territory after the Regulatory Approval of an NDA for a Product; (ii) all matters relating to the Development Plan in the ROW; (iii) all CMC matters relating to the Manufacturing/CMC Plan after the Regulatory Approval of an NDA for a Product; (iv) all non-CMC matters relating to the Manufacturing/CMC Plan that impact commercial supply (i.e., matters relating to choice of secondary packaging, secondary labeling, logistics, and the like); and (v) all matters relating to the Yearly Brand Plan; and (c) notwithstanding the foregoing provisions of this Section 2.3.2, neither Party shall have final decision-making authority with respect to the following: (i) all matters related to the Development Plan in the U.S. Territory during the period immediately prior to the Phase II Meeting until the Regulatory Approval of an NDA for a Product (subject to Section 3.4.3) and (ii) all other matters not otherwise described in Sections 2.3.2(a) and (b) above, including, subject to the parameters set forth in Sections 3.3.2 and 3.7, final decisions with respect to budgets and spending funds in excess of approved budgets (or in excess of [***] percent ([***]%) of the [***] under the budget of a Development Plan, as provided in Section 3.7.2). 2.3.3 Disputes not subject to the final decision-making authority of either Party, as described in Section 2.3.2(c) above, will be resolved by binding arbitration in accordance with the rules of the American Arbitration Association (the "AAA"), unless another non-profit professional dispute resolution organization knowledgeable with respect to drug development is agreed to by the Parties within five (5) days, and the provisions of this Section 2.3.3. (a) The Party desiring to initiate an arbitration proceeding will send a written notice to the other Party requesting the commencement of the arbitration proceeding and specifying the issue to be resolved. Following such notice, the JOC will work in good faith to select one neutral arbitrator, who will be an expert with respect to drug development and the pharmaceuticals industry so as to better understand the legal, business, and scientific issues addressed in the arbitral proceeding. In the event that, within 10 business days of such notice, the JOC is unable to agree upon an arbitrator, who is available to participate in the arbitration proceeding, then, each Party will designate one neutral arbitrator within 15 days thereafter. Within an additional 15 days thereafter, the first two arbitrators will designate a third. Each arbitrator will be a neutral arbitrator, who is an expert in drug development and the pharmaceuticals industry. If either Party fails to choose an arbitrator within the foregoing time period, the AAA (or equivalent organization) will choose an arbitrator on behalf of that Party. Disputes about arbitration procedure will be resolved by the arbitrators or, failing agreement, by the AAA (or equivalent organization) in San Francisco, California. Unless otherwise agreed by the Parties, the arbitration proceedings will be conducted in San Francisco, California. (b) Within 5 days of the selection of the final arbitrator, the Parties will deliver to the arbitrators a joint letter (i) stating each of the issues that is the subject of the dispute, (ii) setting forth each Party's final position with respect to each such issue, and (iii) directing the arbitrators to resolve the dispute by selecting the final position of one of the Parties; provided that, if the Parties cannot agree on a joint letter, each Party will submit a letter setting forth its position on each issue, and the failure of any Party to submit such a joint letter will not prevent the arbitration from proceeding. In addition, each Party may submit with the joint letter PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 3 supporting documentation for such Party's final position or a request that the arbitrators permit the Parties to undertake limited discovery. In resolving the dispute, the arbitrators will have no authority to make a decision on any issue other than by selecting the final position of one of the Parties. (c) An arbitration decision will be rendered in writing within 30 days of the submission of the letter described above, which award will be final and binding on the Parties and will be deemed enforceable in any court having concurrent jurisdiction of the subject matter hereof and the Parties. In selecting the final position of one of the Parties, the arbitrators will have the authority to grant specific performance and allocate costs between the Parties (excluding attorneys' fees, which each Party must bear itself); provided that the arbitrators will have no authority to award punitive damages or any damages in excess of the limitations contained in this Agreement. 2.4 COMMITTEES. The JOC shall have the right and power to appoint and delegate its responsibilities to committees, and the composition and eligibility requirements for the same shall be agreed upon by the members of the JOC. Except as otherwise mandated by the JOC, each committee established by the JOC shall be governed by the rules and guidelines applicable to the JOC set forth in this Agreement. 2.5 MEETINGS. 2.5.1 SCHEDULE OF MEETINGS. The JOC shall establish a schedule of times for meetings, taking into account the planning needs of the Development Program and the need of the JOC to consult and render decisions. In no event shall the JOC meet less frequently than quarterly. Meetings shall alternate between the respective offices of the Parties in (i) Princeton, New Jersey or Cary, North Carolina and (ii) San Francisco, California, or another mutually agreed upon location; provided, however, that the Parties may mutually agree to meet by teleconference or video conference or may act by a written memorandum executed by the members of the JOC. 2.5.2 QUORUM; VOTING; DECISIONS. At each JOC meeting, the attendance of at least one member representing each Party shall constitute a quorum. All decisions of the JOC shall be made by unanimous vote. Representatives of each Party or of its Affiliates who are not members of the JOC may attend JOC meetings or committee meetings as non-voting observers at the invitation of either Party with the prior approval of the other Party, which approval shall not be unreasonably withheld. 2.5.3 AGENDA AND MINUTES. An agenda for each JOC meeting shall be circulated no less than three days prior to the meeting, to the extent practicable. The JOC shall keep accurate minutes of its deliberations that record all proposed decisions and all actions recommended or taken. Drafts of the minutes shall be delivered to the members of the JOC within a reasonable time, not to exceed 10 days after the meeting. The responsibility for the preparation and circulation of the draft minutes shall alternate between the Parties. Draft minutes then shall be edited by the Co-Chairmen and shall be issued in final form within a reasonable time not to exceed 14 days after the meeting. PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 4 3. DEVELOPMENT PROGRAM 3.1 DEVELOPMENT OF PRODUCTS. 3.1.1 INITIAL PRODUCT DESIGNATIONS. The Parties shall Develop no less than four (4) Products under the Collaboration. The Parties agree that the first such Product shall be Remoxy, the second such Product shall be a product within the Field containing [***] as its opioid API, and the third such Product shall be a product within the Field containing [***] as its opioid API. The fourth Product, and all additional Products, shall be selected as set forth in Section 3.1.2 below. 3.1.2 DESIGNATION OF ADDITIONAL PRODUCTS. In Consultation with PTI and review by the JOC and in accordance with the strategies of the Program Plans, King shall have the right to designate which products within the Field, in addition to the three (3) Products listed in Section 3.1.1 above, shall be selected for Development and Marketing under the Development Program. Upon King's designation of a product within the Field for inclusion in the Development Program, PTI shall inform Durect of such selection, and provided that such product is a product that may be developed under the DLA, PTI shall exercise its rights under Section 2.1 of the DLA to designate such product a "Licensed Product," and the Parties shall thereafter promptly generate the Program Plans for such Product, all as further described in this Article 3. 3.1.3 MINIMUM DEVELOPMENT AND MARKETING OBLIGATIONS. (a) King shall ensure that it is Marketing or funding the Development of a minimum of at least [***] different Products under the Collaboration at all times; provided that beginning on [***], such minimum number of different Products shall increase to [***]. In order to satisfy the foregoing requirement that King is Marketing or funding the Development of at least [***] different Products under the Collaboration by [***], King further agrees that it will designate a [***] Product to be Developed and Marketed hereunder no later than [***]. King further agrees that in the event King (i) does not designate a [***] Product by [***] or (ii) notifies PTI of its intention to terminate Development and Marketing of a Product pursuant to Section 3.1.4, is required pursuant to Section 3.1.4 to designate a replacement Product, and fails to select such a replacement Product within the applicable time frame specified thereunder (and such failure would result in a default of King's obligations under this Section 3.1.3), PTI will be entitled to designate such Product on King's behalf. For purposes of this Section 3.1.3, King shall be deemed to be "funding the Development" of a Product if King has (A) designated such Product for inclusion within the Collaboration pursuant to Section 3.1.2, (B) has used commercially reasonable efforts to have the JOC promptly approve a Development Plan and Manufacturing/CMC Plan for such Product, and (C) is meeting its material funding obligations under all existing Program Plans. (b) Subject to King's satisfaction of its funding obligations pursuant to Section 3.1.3(a) above, PTI shall ensure that it is Developing, together with the Products King is Marketing, a minimum of at least [***] different Products under the Collaboration at all times; provided that beginning on [***], such minimum number of different Products shall increase to [***]. PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 5 3.1.4 PRODUCT TERMINATION. King shall have the right to terminate Development and Marketing of a Product (the "Terminated Product") hereunder by providing written notice to PTI [***] days prior to the effective date of such termination and, if necessary to comply with its obligations for maintaining a minimum number of Products, as provided in Section 3.1.3(a) above, designating a replacement Product in such notice, which shall be treated as a Product designation in accordance with Section 3.1.2 above, and the provisions of Section 9.2.2(a) shall apply to such Terminated Product in all respects. If a replacement Product is required to be designated, such notice of termination for such Terminated Product shall not be effective until a replacement Product has been selected and a Development Plan for such replacement Product has been approved by the JOC. 3.2 DURECT LICENSE AGREEMENT. Notwithstanding anything herein to the contrary, King acknowledges and agrees that PTI is subject to certain obligations under the Durect License Agreement as set forth in Section 2.4 of the License Agreement. 3.3 PROGRAM PLANS. Disputes relating to the matters set forth in this Section 3.3 will be governed by Section 2.3.2. 3.3.1 GENERALLY. In consultation with the JOC and in accordance with the strategy and objectives of the Program Plans, each Party shall be primarily responsible for those tasks assigned it as set forth in each Program Plan and such obligations set forth in this Agreement. The Parties will take such actions necessary to define, generate, and approve the Program Plans for each Product following the Effective Date. The Parties shall ensure that the Program Plans, including all timelines set forth therein, are consistent with each other, accurately reflect the objectives of the Development Program, and meet all of PTI's obligations to Durect under the DLA. Each Program Plan shall be in writing and shall set forth objectives and tasks to be performed by each of the Parties for the period covered by the Program Plan as agreed by such Party and as specifically set forth in this Agreement. Any Program Plan may be amended at any time in accordance with the same procedures applicable to the adoption thereof. Although not specifically a part of a Program Plan, all issues and activities relating to Patent Rights and Technology used in connection with a Product shall be subject to review of the JOC. 3.3.2 PROGRAM PLAN BUDGETS. (a) Each Program Plan shall set forth an annual budget with respect to all material tasks required to be conducted by the Parties pursuant to such Program Plan. Each Party shall use commercially reasonable efforts to complete all tasks assigned to it pursuant to the Program Plans in accordance with the funding allocated to such tasks in the budget. All overruns and additional expenditures will be governed by Section 3.7. (b) PTI will provide the JOC with updated budgets for each Development Plan and Manufacturing/CMC Plan on a [***], which updated budgets shall specify the funding which PTI projects to be required during the following [***] to perform its obligations under such Development Plans and Manufacturing/CMC Plans. Each PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 6 such budget will be subject to review and approval of the JOC (such approval not to be unreasonably withheld); provided that it is understood that such budgets may include expenses for Third Party services extending beyond the [***] period covered by such budget if incurring such expenses is contractually required in obtaining such services. (c) Notwithstanding anything to the contrary herein, the Parties agree that the Collaboration Costs budgeted for PTI's activities under the Development Plan(s) and Manufacturing/CMC Plan(s) with respect to Remoxy between the [***] shall be at least [***]. The Parties further agree that King's financial commitment with respect to Products other than Remoxy shall be commensurate with the foregoing commitment to Remoxy, taking into account such factors as the stage of development and potential market of such Products relative to the stage of development and potential market of Remoxy and the regulatory strategy with respect to the Product; provided that the total Collaboration Costs budgeted for PTI's activities under the Development Plans and Manufacturing/CMC Plans for all Products shall not exceed [***] a year in any of the first [***] Years following the inception of this Agreement, or a cumulative total of one hundred million U.S. dollars ($100,000,000). Notwithstanding the foregoing, the Parties agree that the JOC may (but the arbitrators may not) waive the preceding spending limits if, in its reasonable judgment, such increases in spending are warranted. For purposes of calculating the foregoing annual and cumulative spending limits, as well as the foregoing minimum financial commitment with respect to Remoxy, Collaboration Costs as used in this section shall exclude (i) any [***], (ii) costs of [***], including costs incurred in [***], (iii) all costs and expenses related to [***], and (iv) costs incurred in connection with [***], it being understood that the [***]. The Parties further agree that with respect to Products subsequent to Remoxy, prompt Development and Regulatory Approval shall mean the speediest Development Plan needed to reach Development and Regulatory Approval of any dosage form of such Products in the U.S. Territory, consistent with patients' safety and all applicable regulatory rules and regulations. If the Program Plans need to be amended to maintain these annual and cumulative limits, King will propose those amendments it believes are required, subject to review and approval of PTI, which approval shall not be unreasonably withheld. 3.4 DEVELOPMENT PLANS. 3.4.1 PTI, in Consultation with King, will prepare, and provide the JOC with a copy of, a Development Plan for each Product, which will include pre-clinical, clinical, and regulatory timelines and an annual budget, including a general overview of the expected schedule of meetings, discussions, and correspondence with Regulatory Authorities and the expected Regulatory Filings to be completed and maintained by the Collaboration. The Development Plan will be subject to review and approval of the JOC, including ongoing review as provided in Section 2.2.1, which approval not to be unreasonably withheld; provided that the PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 7 JOC shall not withhold its approval or otherwise object to the budget in such Development Plan on any grounds that are inconsistent with the criteria and objectives set forth in Section 3.3.2(c) above. 3.4.2 Subject to Sections 3.4.5 and 3.4.6 below, the provisions of this Section 3.4.2 will apply to all matters relating to the Development Plan in the U.S. Territory. Until the Completion of Phase II for a Product (but immediately prior to the Phase II Meeting), PTI, in Consultation with King, will have sole control and responsibility for execution of all matters described in the Development Plan with respect to a Product. Following the Completion of Phase II for a Product but prior to the Regulatory Approval of an NDA for such Product, King and PTI will assume joint control and responsibility, through the JOC, for all matters described in the Development Plan with respect to such Product; provided that PTI, in Consultation with King, will continue to be responsible for execution of matters under such plan. Following such Regulatory Approval, King, in Consultation with PTI, will have sole control and responsibility for execution of all matters described in the Development Plan with respect to such Product. In addition, each Party will be given the opportunity to review and comment on draft and final development plans and all associated protocols, reports, and Regulatory Filings on an ongoing basis. Draft documents will be provided to a Party in electronic or written form in advance of finalization or submission to Regulatory Authorities. 3.4.3 In the event the FDA, during the Phase II Meeting for a Product, determines that the Development of such Product may not proceed to Phase III, or the Parties otherwise agree that additional Development should be performed before proceeding to Phase III, King and PTI will jointly develop a revised Development Plan for such Product, and PTI will then reassume sole control and responsibility for execution of such Development Plan until Completion of Phase II for a Product (immediately prior to the Phase II Meeting), as provided herein. 3.4.4 King, in Consultation with PTI, will have sole control and responsibility for execution of all Product Development and associated regulatory matters described in the Development Plan with respect to a Product in the ROW. King, or its Affiliates or Sublicensees, shall be responsible for all clinical and regulatory expenses incurred in seeking Regulatory Approval in markets in the ROW. 3.4.5 Upon the FDA's approval of an NDA for a Product in the U.S. Territory, PTI, in Consultation with King, shall continue to have sole control and responsibility for the execution of any post-approval commitments mandated by the FDA with respect to such Product and the first Regulatory Approval thereof, and King, in Consultation with PTI, shall assume sole control and responsibility for execution of further Product Development of the Product. 3.4.6 In the event an NDA for Remoxy has not been accepted for filing by the FDA within [***] months of the Effective Date, King may elect to assume sole control and responsibility for execution of all matters under the Development Plan (and all CMC matters under the Manufacturing/CMC Plans) with respect to Remoxy in the U.S. Territory by providing PTI with written notice thereof. In such event, notwithstanding the provisions of Section 2.3.2, PTI will not have final decision-making authority with respect to matters related to Remoxy under the Development Plan, but King will have the final decision-making authority with respect PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 8 to all such matters. Both Parties agree that such transfer of control and responsibility from PTI to King described in this Section 3.4.6 shall in no way diminish PTI's or Durect's right to receive royalties or milestones, as provided in the License Agreement. King agrees to use commercially reasonable efforts to diligently proceed with execution of the Development Plan in good faith and consistent with PTI's obligations under the DLA and this Agreement and shall use commercially reasonable efforts and diligence in Developing and seeking Regulatory Approval of Remoxy in the U.S. Territory in accordance with its business, legal, medical, and scientific judgment and in undertaking investigations and actions required to obtain appropriate Regulatory Approvals necessary to market Remoxy in the U.S. Territory and to meet its obligations hereunder. In addition, following such transfer of control and responsibility, King will provide PTI with such plans, budgets, data, and other information as PTI had been obligated to provide to King prior to the assumption of control by King under this Section 3.4.6. 3.4.7 Upon transfer of control and responsibility of a Product, the Parties will cooperate with each other in effecting a Tech Transfer of such matters to King with respect to such Product. 3.4.8 PTI shall use commercially reasonable efforts to complete all tasks assigned to it pursuant to the Development Plans in accordance with the budget; provided, however, that PTI may spend the funds allocated to such task plus an additional [***]% of such funds, which additional expenditures shall be paid by King. If the actual costs under a particular Development Plan will likely exceed [***]% of the funds allocated to such task, the provisions of Section 3.7 shall govern. 3.4.9 During the period in which the Parties share joint control of matters under the Development Plan, both Parties agree that only PTI may initiate or respond to FDA communications (including e-mail) regarding a Product; provided, however, that PTI shall keep King informed regarding all important communications, whether written or oral, between PTI and the FDA and shall provide King with an opportunity to review and comment on all important written correspondence (including all e-mail correspondence) and participate in all planned meetings and telephone calls, between PTI and the FDA. 3.4.10 All INDs and NDAs for a Product in the U.S. Territory will be owned and maintained in the name of PTI; provided that, upon Regulatory Approval of a Product, ownership and maintenance of INDs and NDAs for such Product will be transferred to King. In connection with such transfer to King, PTI will transfer all underlying clinical data and regulatory filings in an electronic format, to the extent available, agreed upon by the Parties. PTI shall transfer the NDA for each approved Product to King within [***] days of the receipt of Regulatory Approval of such Product. PTI further agrees to transfer the applicable INDs, clinical data, and other regulatory filings within [***] days of the Regulatory Approval of the Product to which they relate. All INDs and NDAs for a Product in the ROW will be owned and maintained by King. PTI hereby grants King access to, and right of reference to, any INDs and NDAs for Products in the Territory owned and maintained in the name of PTI to the extent necessary for King to perform its obligations hereunder or conduct Product Development in the Territory. King hereby grants PTI access to, and right of reference to, any INDs and NDAs for Products in the Territory owned and maintained in the name of King to the extent necessary for PTI (a) to perform its obligations hereunder, (b) to develop products PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 9 that are within the Field (including Products) outside the Territory, (c) to develop [***] pursuant to the terms of this Agreement and the License Agreement, (d) to develop products outside the Field, including [***], or (e) as otherwise reasonably requested by PTI. For purposes of clarity, the rights granted by King to PTI in the preceding sentence shall include the right to permit Third Parties to access or reference such Regulatory Filings, so long as such Third Parties have agreed to confidentiality obligations that are at least as stringent as those set forth herein; provided that PTI agrees that it will not provide such rights of access or reference to Third Parties who are not engaged in a research, development, manufacturing, or marketing relationship with PTI. 3.4.11 PTI will use commercially reasonable efforts and diligence in Developing and seeking Regulatory Approval of each Product in the U.S. Territory in accordance with its business, legal, medical, and scientific judgment and in undertaking investigations and actions required to obtain appropriate Regulatory Approvals necessary to market Products in the U.S. Territory and to meet its obligations hereunder. 3.4.12 Subject to Section 2.1.4 of the License Agreement, following the acceptance for review by a Regulatory Authority in the U.S. Territory of an NDA for a Product, King will use commercially reasonable efforts and diligence in conducting Product Development and seeking Regulatory Approval of such Product in the Major Market Countries in the ROW in accordance with its business, legal, medical, and scientific judgment and in undertaking investigations and actions required to obtain appropriate Regulatory Approvals necessary to market such Product in the Major Market Countries and to meet its obligations hereunder. In exercising its business, legal, medical, and scientific judgment, King may take the following factors, among other things, into consideration: [***]; provided that the level of efforts and diligence used by King in conducting Product Development and seeking Regulatory Approval of Products in the ROW shall at all times be at least a level of efforts sufficient to ensure that PTI's obligations to Durect under the DLA are satisfied. Notwithstanding anything herein or in the License Agreement to the contrary, in the event PTI obtains Regulatory Approval for a [***] in any country in the Territory, including a Major Market Country, before King obtains in such country Regulatory Approval for the Product that contains the same opioid agonist as its API as such [***], King shall not be obligated to conduct Product Development, seek Regulatory Approval, or Market such Product in such country. 3.5 MANUFACTURING/CMC PLANS. 3.5.1 King and PTI will jointly prepare each Manufacturing/CMC Plan and provide a copy to the JOC for its review and approval. Notwithstanding the foregoing, the Parties agree that PTI shall be solely responsible for preparing a Manufacturing/CMC Plan for PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 10 Remoxy, it being understood that King will be given an opportunity to review and offer recommendations regarding such plan during its preparation, which recommendations PTI will consider in good faith. 3.5.2 PTI, in Consultation with King, will have control and responsibility for execution and implementation of all CMC development of a Product throughout the Territory until the first Regulatory Approval for such Product in the applicable country, including responsibility for provision of CTM, CMC information for such Product in Regulatory Filings, and pre-market validation of such Product. Notwithstanding the foregoing, PTI, in Consultation with King, will continue to have control and responsibility for execution and implementation of all CMC development after the first Regulatory Approval of a Product for all changes in formulation, including changes in dosage strength, requiring a further pre-market clearance by the FDA or other Regulatory Authority. Such changes in formulation may include line extension developments or reformulations that are, in PTI's reasonable judgment, within the scope of the DLA. For purposes of clarity, with respect to novel Product formulations, PTI and Durect shall be responsible for determining the qualitative and quantitative composition of each novel formulation with respect to excipients and API and setting technical and regulatory specifications for each such excipient and API used in creating such novel formulation. King shall have the right to select the manufacturer of such excipients and API prior to the manufacture of Phase III CTM, so long as the excipients supplied by King's selected manufacturer comply with the technical and regulatory specifications set by PTI and Durect. King shall have the right to negotiate and enter into supply agreements for API and excipients and to be the assignee with respect to agreements that may be in place for such Product excipients and API as of the Effective Date, in each case to the extent permitted under such supply agreements, and in compliance with the DLA and Section 2.1.3 of the License Agreement. 3.5.3 Except as provided in Section 3.5.2 above, King, in Consultation with PTI, will have control and responsibility for execution and implementation of post-approval support of each Product immediately upon the Regulatory Approval of an NDA for such Product, including logistics planning relating to such Product. To the extent PTI is obligated to purchase any excipients, additives, solvents, API, bulk form of Product, or other ingredients or materials from Durect pursuant to the terms of the DLA and which ingredients or materials, under the terms of the DLA, would be required to be used by King in its manufacture of Products, PTI shall sell to King such ingredients or materials so purchased by PTI at PTI's actual cost, without any mark-up. In connection with the transfer of control and responsibility, upon filing of an NDA for a Product, the Parties will cooperate with each other to develop a plan for the completion of the Tech Transfer of such matters; and, with respect to all information, files, and documentation available as of the date of such NDA filing, within sixty (60) days from the acceptance by a Regulatory Authority of the NDA filing for a Product, the Parties will complete the Tech Transfer of such matters, including transferring files necessary for chemistry and manufacturing, to King with respect to such Product. Thereafter, the Parties will continue to perform Tech Transfer in a timely manner with respect to all other information, files, and documentation relating to such matters, including permitting King to witness pre-market validation and manufacture and quality operations. PTI agrees to assist, as requested by King, in post-approval support (including providing technical assistance, troubleshooting, and provision of post-marketing clinical supplies) to maximize the market opportunity for the Products and to assure uninterrupted supply. PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 11 3.5.4 In Consultation with King, PTI may enter into such agreements covering the clinical supply and manufacture of Products as are reasonably necessary to accomplish the objectives and purposes of the Development Program; and King agrees to abide by the terms of any such agreements which King has approved or which has been unanimously approved by the JOC pursuant to its oversight and approval functions set forth in Section 2.2.5. King may enter into such agreements covering the commercial supply and manufacture of component materials and API following the Completion of Phase II as are reasonably necessary to accomplish the objectives and purposes of the Development Program. King may at any time enter into an agreement covering manufacture of commercial Product. 3.5.5 The Parties agree that PTI's existing plan for manufacturing and quality operations with respect to Remoxy will continue to be followed by the Collaboration, with a commercial supply agreement being entered into with Mallinckrodt-Hobart as the primary manufacturer. King acknowledges that PTI's current understanding with Mallinckrodt-Hobart contemplates a term for such supply agreement of at least [***] of commercial launch in the United States. PTI, in Consultation with King, may continue negotiating an agreement with Mallinckrodt-Hobart; provided that any such agreement will include a provision that the agreement [***]; and provided further that [***]. The Mallinckrodt-Hobart supply agreement, with respect to Remoxy, will be assigned by PTI to King at a time mutually agreed to by the Parties, but no later than upon FDA approval of an NDA for Remoxy. Except with King's consent, not to be unreasonably withheld, the Mallinckrodt-Hobart supply agreement will have provisions such that the supply of Remoxy is independent of the supply of any other products covered by the agreement (including provisions so that a breach by PTI of its obligations with respect to the other products will not affect the supply of Remoxy) and permit the assignment of the supply agreement with respect to Remoxy independent of any other products, it being understood that King shall not withhold its consent to PTI's entering into the Mallinckrodt-Hobart supply agreement if PTI agrees to indemnify King and hold King harmless with respect to damages which King may incur as a result of Mallinckrodt-Hobart's cross-termination of the supply agreement with respect to Remoxy as a result of a PTI's breach of its obligations thereunder with respect to a product other than Remoxy. PTI will use commercially reasonable efforts to have provisions of the type described in the preceding sentence included in the Mallinckrodt-Hobart supply agreement. 3.5.6 Except with respect to Remoxy, which is addressed by Section 3.5.5 above, King will have control and responsibility for the commercial supply of Products in the Territory. Except as provided for Remoxy in Sections 3.5.1, 3.5.2, and 3.5.5 above, King may, in its sole discretion, decide to include its own manufacturing facility as a primary manufacturing site in the initial Regulatory Filings for any Products. Upon PTI's request and with King's consent (such consent not to be unreasonably withheld), King agrees to enter into an agreement PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 12 with respect to King's commercial supply of Products to PTI or its licensee in Australia and New Zealand, the terms of such agreement to be negotiated in good faith. In the event that King agrees to supply Product to PTI and PTI agrees to purchase Product from King for commercial supply in Australia and New Zealand, then such Product will be sold by King to PTI [***]. 3.5.7 Upon PTI's written request, a second manufacturing site will be qualified for each Product at such time as any of the following shall occur: (a) such [***], or (b) there is an [***], or (c) [***]. With respect to Remoxy, such qualification will be obtained on a post-approval basis and may include, at King's discretion, a King facility or other contract manufacturer. With respect to all other Products, if the primary site for such Product is a King manufacturing site, PTI may require that the second manufacturing site not be a King manufacturing site. 3.5.8 In connection with the Manufacturing/CMC Plans, each Party (a) will, upon written request of the other Party, provide the other with the following documents to the extent that such documents being requested are available and in the possession or control of the Party to whom the request is made: for each Product, pharmaceutics development report and history, copies of CMC section submitted as part of any Regulatory Filings, and minutes from any meeting or correspondence with any Regulatory Authority regarding pharmaceutics development or CMC; and (b) will allow the other Party to examine and copy, at the site where such records are normally stored and at a time that is mutually acceptable to the Parties, the following: (i) CMC development protocols and reports, (ii) for each batch of API and each batch of Product produced as CTM, batch records, analytical monograph (tests and specifications), certificate of analysis for Good Manufacturing Practices release, a table containing initial release and stability testing results (which table will be updated each time a stability pull point is analyzed), copies of any out of specification or laboratory investigation report events, and report of any failed batches and any corrective action; and (iii) for each batch of Product produced as CTM, packaging and labeling batch records. The Manufacturing/CMC Plans will include a list and brief description of protocols to be developed thereunder. The reports described in clause (a) above and the protocols in the Manufacturing/CMC Plans that King notifies PTI that King would like to review will be developed in Consultation with the other Party and will be made available to the other Party in draft form with sufficient time for such Party to review and comment on the foregoing, as well as being provided to the other Party in final form when such materials are completed. In addition, each Party will make available to the other Party such additional documentation reasonably related to such other Party's performance of its obligations hereunder that is in the possession or control of the Party to whom the request is made as such documentation is reasonably requested by the other Party. 3.6 YEARLY BRAND PLANS. King will prepare each Yearly Brand Plan for each Product and provide a copy to the JOC for its review and comment. King, in Consultation with PTI, will PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 13 have control and responsibility for Marketing each Product and for all matters under the Yearly Brand Plan, including determining the packaging, trade dress, and labeling (to the extent not dictated by any applicable Regulatory Approval) for the distribution and sale of Product. Subject to Section 2.1.4 of the License Agreement, King shall use commercially reasonable efforts and diligence to Market the Product commensurate with industry standards; provided that in no event shall such level of efforts and diligence be less than King uses in marketing its own products of similar market potential and at a similar stage in development as the applicable Product, taking into account the competitiveness of the marketplace, the proprietary position of the Product, and the efforts and resources available to a company having a comparable market capitalization and taking into account then-current market conditions. King will spend at least [***] on Marketing for Remoxy in the U.S. Territory (excluding expenses related to a sales force) between the Closing Date and the date of Regulatory Approval of Remoxy by the FDA; provided that King will be entitled to suspend such spending in the event the JOC decides to cease pursuing Regulatory Approval of Remoxy in the U.S. Territory, such suspension to only remain in effect until such time as the JOC elects to resume pursuing Regulatory Approval of Remoxy in the U.S. Territory; provided further that King may propose changes in spending levels, with respect to which changes PTI will not unreasonably withhold its consent, in the event of (a) the FDA not accepting the NDA covering Remoxy for filing (or refusal to file), (b) a determination by the FDA that such NDA is not approvable, or (c) a failure by the FDA to approve such NDA within eighteen (18) months of the date of the FDA's acceptance of an NDA for Remoxy. 3.7 COLLABORATION COSTS, OVERRUNS, AND ADDITIONAL EXPENDITURES. 3.7.1 Subject to the terms and conditions of this Agreement, including Section 3.3.2, (a) all Collaboration Costs incurred by either Party on and after the Closing Date shall be paid by King; and (b) all Collaboration Costs incurred by either Party on or after the Effective Date but prior to the Closing Date will be paid by King, with such payment not to be paid prior to the Closing Date, so long as this Agreement is not terminated prior to Closing and such Collaboration Costs comply with the terms and conditions of this Agreement, as it will be in effect as of the Closing Date. Except as otherwise provided herein, PTI shall be entitled to reimbursement for the Collaboration Costs incurred by it in connection with the Collaboration; provided that all such Collaboration Costs must be included in the budget governing the activities for which such costs were incurred, subject to the provisions of this Section 3.7. All payments made by King hereunder shall be treated for all purposes, including all tax and accounting purposes, as the expenses of King and any applicable deductions shall be wholly allocable to King. 3.7.2 The Parties understand and agree that a Product may generate new data or may be the subject of new regulatory guidance at any time for any reason during a Calendar Year and that such changes may require substantial revisions to the clinical development activities associated with a Product or may cause PTI, in Consultation with King, or Durect to re-work a Product. In the event either Party anticipates or becomes aware that the actual costs of any given task assigned to it may or will likely exceed the funds allocated to such task in the applicable Program Plan budget, such Party shall promptly notify the JOC in writing. If the actual aggregate costs of conducting a particular Program Plan will likely exceed the aggregate annual funds budgeted for such Program Plan under the applicable Program Plan budget (or in the case of work conducted under a Development Plan, if the actual aggregate costs of conducting a PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 14 particular Development Plan will likely exceed [***] of the aggregate annual funds budgeted for such Development Plan under the applicable Development Plan budget), the JOC shall work in good faith for up to thirty (30) days to approve a budget amendment that provides for the continued prompt clinical Development and Regulatory Approval of a Product. Such amendment may include increasing the budget, readjusting the budget to allocate additional funds to such task, revising the scope of such task to permit satisfactory completion at the then-budgeted funding level, or all three. In the event no decision is reached, the matter shall be subject to the arbitration provisions of Section 2.3.3 hereof. For purposes of clarity, neither Party shall be obligated to perform any additional services in connection with such task if the JOC does not approve increasing the budget to pay for such additional services. 3.7.3 Notwithstanding the foregoing, either Party may, in its discretion, spend additional amounts above and beyond those allocated in the applicable budget ("Discretionary Funding") on any task assigned to such Party pursuant to the Program Plans or on any other task the JOC has approved. In such event, the Party wishing to expend Discretionary Funding shall first inform the second Party of such first Party's intent to do so. If the second Party consents to the Discretionary Funding being deemed a Collaboration Cost, which consent shall not be unreasonably withheld, the Discretionary Funding shall constitute a Collaboration Cost. If the second Party does not consent, then the Discretionary Funding shall not constitute a Collaboration Cost, but shall be borne solely by the Party undertaking the Discretionary Funding. 3.7.4 Except to the extent this Agreement expressly provides for payments that do not require JOC approval, and except to the extent the JOC has approved any payment hereunder, neither Party shall (a) be obligated to incur any costs or expend any funds that have not been approved by such Party or (b) have the authority to cause the other Party to incur any costs or expend any funds that have not been approved by such other Party. 3.8 THIRD PARTY LICENSES AND COLLABORATIONS. Subject to the review and the approval of the JOC as provided in Section 2.2.5, King may enter into such other Third Party licenses and collaboration agreements as are reasonably necessary to accomplish the objectives and purposes of the Development Program; and subject to the review and the approval of the JOC as provided in Section 2.2.5, PTI may enter into such Third Party licenses and collaborations agreements as are reasonably necessary to accomplish the objectives and purposes of the Collaboration. Except with the other Party's consent, not to be unreasonably withheld, each such agreement shall (a) if only one Party is a party to the agreement, name the other Party as a third party beneficiary to such agreement, (b) include an assignment of all right, title, and interest in and to all work product and all inventions arising from the performance of such agreement, and all intellectual property rights attaching thereto to the contracting Party, and (c) bind the relevant Third Party by obligations of confidentiality and non-use with respect to all such work product, inventions, and intellectual property rights that are at least as stringent as those set forth herein. In order to ensure the ability of a Party (the "Non-Defaulting Party") to proceed with the Development Program notwithstanding certain conduct of the other Party (the "Defaulting Party") or the termination of this Agreement by the Non-Defaulting Party pursuant to Section 9.2.3, the JOC may require the inclusion, in those subcontracts, licenses, and other agreements (including manufacturing and supply agreements) entered into in connection with the Development Program ("Third Party Agreements") that are or are likely to become material to the conduct of the Development Program, of (i) an enforceable provision granting to the Non-Defaulting PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 15 Party hereto the same rights, benefits, and obligations as those granted to the Defaulting Party under that Third Party Agreement (whether by automatic assignment, a direct agreement, or otherwise), contingent upon a Default by the Defaulting Party of that Third Party Agreement or the termination of this Agreement by the Non-Defaulting Party pursuant to Section 9.2.3, and (ii) the applicable Third-Party's unconditional consent to such provision. 3.9 FAILURE TO PERFORM. 3.9.1 GENERAL. In the event that a Party does not perform a task or tasks assigned to it under a Program Plan, including due to a dispute as to the budget or scope of such task, or otherwise fails to perform its Development or Marketing obligations hereunder, including meeting timelines and budgets set forth in the Program Plans, PTI and King will negotiate in good faith with respect to remedying such failures. In the event such negotiations do not result in a resolution of such issues satisfactory to both Parties within thirty (30) days of the initiation of such negotiations, the matter shall be submitted to arbitration as set forth in Section 2.3.3. 3.9.2 REMEDY. In the event the arbitrators determine that the failure to perform was intentional or willful (but not as a result of a failure to perform because of a disagreement about budget matters or regulatory strategy, which disagreement prevents the Parties from continuing to perform their obligations), the arbitrators may grant the non-breaching Party the right, but not the obligation, to perform the task or tasks of the breaching Party. In addition, in the event of any breach, including a failure to use commercially reasonable efforts to perform a Party's obligations, the arbitrators may award the non-breaching Party monetary damages. 3.9.3 NO WAIVER. In the event a Party is granted a right to perform the other Party's task, a Party's election to perform such task will not be deemed a waiver with respect to such electing Party's ability to exercise any other rights hereunder, including any rights under Section 9.2.2 or 9.2.3. 4. INFORMATION EXCHANGE 4.1 RECORDS. 4.1.1 RECORD KEEPING. Each of PTI and King shall maintain records in sufficient detail and in accordance with Good Laboratory Practice, Good Clinical Practice, and Good Manufacturing Practice, and as will properly reflect and document, in a manner appropriate for purposes of supporting the filing of potential patent applications and Regulatory Filings, all work done and results achieved in the performance of the Development Program (including all data in the form required under any Applicable Law); provided, however, that prior to King's election to assume control and responsibility of execution of all matters under the Development Plan with respect to a particular Product, PTI shall be responsible for maintaining master files in accordance with Good Clinical Practices, Good Laboratory Practices, and Good Manufacturing Practices, to the extent applicable; provided, further, that upon such election by King, PTI shall transfer such records to King with respect to such Product. Subject to Section 6.4.3 hereof, PTI and King each hereby grants the other the right to inspect and copy such records to the extent reasonably required for the performance of its obligations or exercise of its rights under this Agreement, and neither Party shall use such records or information except to the extent otherwise permitted by this Agreement. PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 16 4.1.2 REPORTS. Each Party shall keep the JOC reasonably informed about the status of the Development Program, including furnishing the JOC with copies of all material reports that relate to the Development Program. In particular, without limitation, each Party shall (a) provide periodic reports in reasonable detail to the JOC, at least each Calendar Quarter and as requested from time to time by the JOC; (b) provide the other Party with access to all Technology and information employed in or arising out of the Development Program solely for the purpose of conducting their respective roles hereunder; (c) provide the other Party with the information and reports described in Section 3.5.8 at least each Calendar Quarter and as requested from time to time by the other Party; and (d) provide the other Party with information concerning the Development Program as such other Party shall reasonably request. For purposes hereof, "information" will include data, results, reports, records, and similar information. 4.2 UPDATES; ADVERSE EVENT INFORMATION. 4.2.1 ADVERSE EVENT REPORTS. In addition to the reports described in Section 4.1.2 above, each Party shall provide the JOC with all adverse event information and product complaint information required by such Party to be disclosed to any Regulatory Authority in connection with the Development, Marketing, or sale of any Product, within time frames consistent with reporting obligations under Applicable Law. 4.2.2 CONFIDENTIAL INFORMATION. Except as otherwise required in connection with disclosures to Regulatory Authorities required by Applicable Law, all reports, updates, adverse event, or product complaint and other information provided by a Party under this Agreement (including under this Section 4.2) shall be considered Confidential Information of both Parties, regardless of who provided the same, and shall be subject to the terms of Article 8. 4.3 SALES REPORT. Starting immediately following the First Commercial Sale of a Product and for the Term of this Agreement, King, at its own expense, shall provide PTI with such U.S. sales reports that King has obtained for itself from a third party vendor of King's choice (such as IMS or NDC). Such report shall be provided to PTI on a timely basis in electronic form, if available, each Calendar Quarter and shall include no less than the following data (provided that King has obtained or can obtain such data without undue burden): (a) Product sales by territory, by prescriber, and by strength, (b) Product sales by hospital, clinic, or mail-order services, independent pharmacies, chains, mass merchandisers, and food stores, (c) a comparison of actual Product sales versus King's forecast sales, (d) wholesale volume reports, (e) top 250 hospital report, and (f) a summary of managed care accounts by volume of Product. In addition, starting immediately following the First Commercial Sale of a Product and for eighteen (18) months thereafter, King, at its own expense, shall (i) provide PTI with a weekly Product sales report in electronic form and (ii) provide telephonic (or in-person) access to King's national sales manager for purposes of holding an accurate discussion of a Product's commercial sales trends, general market trends, and the like. PTI agrees that all information, data, and reports provided by King to PTI hereunder shall be considered Confidential Information of King, subject to the requirements of Article 8. PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 17 5. CERTAIN OTHER PROVISIONS 5.1 PRODUCT LIABILITY COSTS. The Parties understand and agree that, because of the nature of the collaborative effort set forth in this Agreement, should any Third Party claims be asserted against either Party or both Parties or any of their Affiliates, agents, or representatives that are in the nature of product liability claims ("Claims"), the Parties will cooperate through the JOC to ensure that such claims are defended and settled or compromised in a manner that best protects the interests of the Parties. In addition, the Parties will procure and maintain product liability insurance with first-class carriers in coverages and amounts and with deductibles not less than those determined by the JOC; provided that: (a) PTI shall obtain such insurance for a Product for Claims arising prior to the Completion of Phase II, at PTI's sole cost, which coverage shall continue until the earlier of (i) the initiation of Phase III for such Product and (ii) five years after the Completion of Phase II for such Product; (b) If Phase III for a Product is initiated, PTI shall obtain such insurance for such Product for Claims arising following Completion of Phase II but prior to the First Commercial Sale of such Product, at PTI's and King's joint and equal cost, which coverage shall continue until the earlier of (i) the First Commercial Sale of such Product and (ii) five years after the first to occur of (A) the completion of Phase III, (B) the decision of the JOC not to proceed with the commercial sale of such Product, and (C) the termination of this Agreement in its entirety pursuant to Article 9 or with respect to such Product pursuant to Section 9.2.2(a), unless PTI or any of its Affiliates or its sublicensee continues to Develop the Product following such termination, in which case clause (d) below will apply; (c) As of the First Commercial Sale of a Product, King shall, at its sole cost, have obtained such insurance for a Product for Claims arising following the First Commercial Sale of such Product, such insurance to be in an appropriate level (at a minimum of $[***]) exclusive of self-insured amounts and shall be in amounts maintained by King for other products of King of similar market potential and at a similar stage in development as the applicable Product, taking into account any particular risks related to such Product, which coverage shall continue until the earlier of (i) the termination of this Agreement in its entirety pursuant to Article 9 or with respect to such Product pursuant to Section 9.2.2(a), so long as PTI or any of its Affiliates or its sublicensee continues to sell the Product following such termination, and (ii) five years after the last commercial sale of the Product pursuant to this Agreement; and (d) PTI shall, at its sole cost, obtain such insurance for a Product for Claims arising following the termination of this Agreement in its entirety or with respect to such Product, so long as PTI or any of its Affiliates or its sublicensee continues to Develop or sell the Product following such termination, such insurance to be in an appropriate level (at a minimum of $[***] in the case of Marketed Products) exclusive of self-insured amounts and shall be in amounts maintained by PTI for other products of PTI of similar market potential and at a similar stage in development as the applicable Product, taking into account any particular risks related to such Product, which coverage shall continue until five years after (i) termination of the Development of such Product if PTI elects not to sell such Product commercially or (ii) the last commercial sale of the Product, as applicable. PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 18 The costs incurred to obtain the insurance described in this Section 5.1 shall not be deemed Collaboration Costs. The insurance described in this Section 5.1 shall name each Party as a co-insured. 5.2 PRODUCT PACKAGING. The Parties agree that packaging and package inserts for each finished Product sold to consumers will include King's and PTI's names and logos prominently displayed, subject to the approval of the applicable Regulatory Authorities. PTI agrees that it shall not use, and it will prohibit its Affiliates or sublicensees from using, trademarks, trade dress (including product intaglio), packaging, or marketing material with respect to the Marketing of products in the Field in Australia and New Zealand that is confusingly similar with the Product Trademarks and any Product trademarks, trade dress, packaging, or marketing material in the Territory, except with respect to the use of PTI's name or logo. For clarity, PTI has the right to develop and market for use in Australia and New Zealand the identical formula, including colorants and inks, and container-closure system, as is developed and marketed for each Product in the Territory; provided, however, that all secondary packaging components must be different. 5.3 MUTUAL FINANCIAL REPORTING. Each Party covenants to provide the other Party written notice at such time as (a) such Party enters the "zone of insolvency," as defined in Applicable Law, including interpretations in applicable case law, (b) such Party's liabilities exceed its assets, (c) such Party is unable to pay its debts as they become due, (d) there is an occurrence of a Default by such Party with respect to any of its debt or payment obligations or any agreement material to the Development Program, or (e) such Party suspends, closes, or otherwise ceases to operate a majority of its business relating to this Agreement and the License Agreement. In addition, within 15 days of a written request of either Party (such request not to be made more than four times during any Calendar Year), the other Party covenants to provide the requesting Party with its most recent audited financial reports. Each Party will treat all notices and financial reports (and the information contained therein) as Confidential Information of the other Party, subject to the terms of Article 8. 6. CLOSING; PAYMENTS 6.1 CLOSING. 6.1.1 COVENANTS PENDING CLOSING. (a) Reasonable Efforts. Subject to the terms and conditions of this Agreement, each of the Parties agrees to use all reasonable efforts to do, or cause to be done, all things necessary and appropriate to satisfy all conditions of and to consummate the transactions contemplated by this Agreement, including the satisfaction of the applicable conditions set forth in Section 6.1.3 below. (b) Filings. The Parties shall cooperate with one another in the preparation, execution, and filing of all documents that are required or permitted to be filed on or before the Closing, including filings pursuant to the HSR Act and will promptly file the same after the Effective Date. The related filing fees shall be borne by King, and the costs and expenses incurred by each Party shall be paid by such Party. PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 19 6.1.2 CLOSING. As promptly as practicable after the Effective Date and after the satisfaction by each Party or, if permissible, waiver of the conditions set forth in Sections 6.1.3(a) and (b), the Parties hereto shall cause the Closing to occur on the Closing Date. The Closing shall be held at the offices of Jones Day, 222 East 41st Street, New York, New York 10017, or such other place as the Parties shall agree, for the purpose of confirming the satisfaction or waiver, as the case may be, of the conditions set forth in Sections 6.1.3(a) and (b). If the Closing Date has not occurred prior to February 9, 2006, either Party may terminate this Agreement upon written notice to the other Party; provided, however, that, as of such date, the Party terminating this Agreement is not in default under this Agreement. 6.1.3 CONDITIONS TO CLOSING. (a) The obligation of PTI to close shall be subject to the satisfaction on or before the Closing Date of the following conditions, any or all of which may be waived in whole or in part by PTI: (i) the expiration or termination of all applicable waiting periods under the HSR Act, unless a joint determination is made by PTI and King (by certification from PTI and King to each other) that notification under the HSR Act is not required; (ii) the representations and warranties made by King in Article 10 shall be true and correct in all material respects as of the Effective Date and as of the Closing Date with the same force and effect as if they had been made as of the Closing Date, and King shall have performed all obligations and conditions herein required to be performed or observed by it on or prior to Closing; (iii) the provision by King to PTI of an officer's certificate certifying that (i) and (ii) above are true and correct as of the Closing Date; (iv) the provision by King to PTI of an opinion of counsel, in form reasonably satisfactory to PTI, that the execution of this Agreement and the License Agreement and the transactions contemplated hereby and thereby are duly authorized by all corporate action on the part of King; (v) the payment to PTI of the Program Fee by King; (vi) the execution by King and delivery to PTI of the License Agreement; and (vii) any agreement entered into by PTI with Mallinckrodt-Hobart pursuant to Section 3.5.5 shall be in form and substance satisfactory to King. PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 20 (b) The obligation of King to close shall be subject to the satisfaction on or before the Closing Date of the following conditions any or all of which may be waived in whole or in part by King: (i) the expiration or termination of all applicable waiting periods under the HSR Act, unless a joint determination is made by PTI and King (by certification from PTI and King to each other) that notification under the HSR Act is not required; (ii) the representations and warranties made by PTI in Article 10 shall be true and correct in all material respects as of the Effective Date and as of the Closing Date with the same force and effect as if they had been made as of the Closing Date, and PTI shall have performed all obligations and conditions herein required to be performed or observed by it on or prior to Closing; (iii) the provision by PTI to King of an officer's certificate certifying that (i) and (ii) above are true and correct as of the Closing Date; (iv) the provision by PTI to King of an opinion of counsel, in form reasonably satisfactory to King, that the execution of this Agreement and the License Agreement and the transactions contemplated hereby and thereby are duly authorized by all corporate action on the part of PTI; (v) the execution by Durect and PTI of an agreement, in the form attached hereto as Exhibit B, granting Durect's consent to the transactions contemplated by this Agreement and the License Agreement; and (vi) the execution by PTI and delivery to King of the License Agreement. 6.2 PROGRAM FEE. Simultaneous with the Closing, King shall pay to PTI a one-time collaboration fee in the amount of one hundred fifty million U.S. dollars ($150,000,000) (the "Program Fee"). The Program Fee shall be paid by King in U.S. dollars by wire to an account designated by PTI. 6.3 MILESTONE PAYMENTS. 6.3.1 DEVELOPMENT MILESTONES. King will make the following payments to PTI within ten (10) days after the determination of the first achievement of each of the milestones set forth below. For purposes of clarity, it is understood and agreed that the following milestone payments shall (a) be non-refundable and non-creditable and (b) only be payable once with respect to each Product, such that that a payment will be due only once for (i) each Product with a given active opioid, but will not be payable with respect to line extensions, new indications, new dosages, or new Regulatory Filings that subsequently may be filed for a Product that contains the same active opioid, and (ii) the first filing of an IND or NDA or the first regulatory approvable letter for such Product in a country of the Territory, notwithstanding the subsequent filing or approval of other Regulatory Filings in other countries in the Territory for a Product with the same active opioid. PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 21

6.3.2 TERMINATION OF MILESTONES. In the event any suit, action, or proceeding results in the entry of an injunction pursuant to Section 4.6 of the License Agreement that prevents King from Marketing a Product, which injunction is unappealable or unappealed within the time allowed for appeal, King's obligation to make milestone payments with respect to future milestones for such Product pursuant to this Section 6.3 shall immediately terminate. It is understood and agreed that following the issuance of any such injunction, PTI's Development and manufacturing obligations with respect to such Product shall be waived, and the Parties shall promptly amend the Project Plans and, if required to meet the minimum obligations under Section 3.1.3, designate a replacement Product pursuant to Section 3.1.2. For purposes of clarity, it is understood that this Section 6.3.2 shall not relieve King of its obligation to pay any milestone payments for milestones that were achieved prior to the date such injunction is issued or to subsequently pay milestones in the event such injunction is lifted. 6.4 COLLABORATION COSTS. 6.4.1 DETERMINATION OF COLLABORATION COSTS. Within [***] following the end of the [***] of each Calendar Quarter, PTI shall submit to King a documented and reasonably detailed accounting of all Collaboration Costs, determined in accordance with GAAP, incurred by PTI with respect to all Products during the [***], which King shall pay to PTI pursuant to Section 3.7 above. All such payments shall be made within [***] following the end of the second month of the applicable Calendar Quarter. 6.4.2 CURRENCY CONVERSION. All Collaboration Costs incurred in currencies other than U.S. dollars shall be converted to U.S. dollars using the method agreed by the Parties and set forth in the budget of the applicable Program Plan. 6.4.3 RECORDS. Each Party shall maintain its records in accordance with GAAP. PTI shall maintain, and shall require that its Affiliates, Sublicensees, and licensees maintain, for three years from the date of each quarterly reconciliation of Collaboration Costs, complete and accurate records of the same, in sufficient detail to allow calculation and verification of Collaboration Costs. King shall have the right for a period of three years after receiving any report or statement with respect to Collaboration Costs to appoint, at its expense, an independent certified public accountant reasonably acceptable to PTI to inspect the relevant records of PTI and its Affiliates and, if applicable, Sublicensees to verify such report or statement. PTI, its Affiliates, and, if applicable, Sublicensees shall each make its records available for inspection by such independent certified public accountant (who agrees to confidentiality provisions consistent PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 22 with Article 8) during regular business hours at such place or places where such records are customarily kept, upon reasonable notice from King, solely to verify the accuracy of the reports and payments. PTI will use commercially reasonable efforts to ensure that King is granted the right to audit PTI's Sublicensees' financial records, as provided herein; provided that, to the extent that PTI does not obtain that right for King, PTI shall obtain for itself such right and, at the request of King, PTI shall exercise such audit right with respect to such Sublicensees and provide the results of such audit for inspection by King pursuant to this Section 6.4.3. Such inspection right shall not be exercised more than once in any Calendar Year. The results of each inspection, if any, shall be binding on both Parties. In the event that any such inspection shall conclude that Collaboration Costs were overstated by more than [***] percent ([***]%) in any given Calendar Year, PTI shall pay for all the reasonable costs of King in respect of the inspection, as well as make any payments required to remedy the overstatement. Any dispute regarding the results of any such inspection hereunder shall be subject to the dispute resolution provisions of Section 2.3 hereof; provided that if PTI is the Party with final decision-making authority over the subject matter in dispute, and the CEO's are unable to reach agreement even after good faith discussions in accordance with Section 2.3, then the dispute shall not be subject to the sole discretion of either Party but shall be subject to arbitration pursuant to the provisions of Section 2.3.3. All information and data reviewed in the inspection shall be used only for the purpose of verifying the accuracy of the reports and payments and shall be treated as PTI's Confidential Information subject to the obligations of this Agreement. 6.4.4 OVERDUE PAYMENTS. All overdue payments, not subject to a bona fide dispute, due and payable pursuant to this Agreement shall bear interest at a rate of [***] per month from the due date until paid in full. 6.4.5 WITHHOLDING TAXES. All payments made by a Party hereunder shall be made to the other Party free and clear of any Taxes. If a Party is required by law to deduct or withhold any Taxes from any payment made hereunder, then such Party shall (a) make such deductions and withholdings; (b) pay the full amount deducted or withheld to the relevant taxing authority or other applicable governmental authority; and (c) promptly provide the other Party with written documentation of any such payment that, if applicable, shall be in a form sufficient to satisfy the requirements of the United States Internal Revenue Code relating to a claim by such other Party for a foreign tax credit in respect of such Tax payment. 7. LIMITATIONS 7.1 FOR PTI. Except as otherwise expressly permitted herein or in the License Agreement with respect to [***], during the Term, PTI agrees that it will not develop or market any products in the Field in the Territory on its own or with or through an Affiliate, Sublicensee, licensee, or other Third Party, or grant to any Affiliate, Sublicensee, licensee, or other Third Party any right, option, license, covenant not to sue, or any other agreement to forbear from enforcing PTI's rights to do so. 7.2 FOR KING. Except as otherwise expressly permitted herein or in the License Agreement with respect to Products, during the Term, King agrees that it will not develop or market any products incorporating SABER Technology in the Territory with Durect or license from Durect or any licensee or other recipient of rights from Durect, any rights to develop or market any such products, except any rights for use in the Collaboration, in each case, either on its own or with or through an Affiliate, Sublicensee, licensee, or other Third Party. PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 23 8. TREATMENT OF CONFIDENTIAL INFORMATION; PUBLICITY. 8.1 CONFIDENTIALITY. 8.1.1 CONFIDENTIALITY OBLIGATIONS. PTI and King each acknowledges and agrees that the other Party's Confidential Information constitutes highly valuable and proprietary confidential information and materials. PTI and King each agrees that during the Term of this Agreement and for an additional five years (or, in the case of any Confidential Information identified as a trade secret by the Disclosing Party at the time of disclosure, for so long as such trade secret Confidential Information is susceptible of remaining a trade secret), it will use commercially reasonable efforts to keep confidential, and will use commercially reasonable efforts to cause its employees, Consultants, Affiliates, agents, advisors, and Sublicensees to keep confidential, all Confidential Information of the other Party. Neither PTI nor King nor any of their respective employees, Consultants, Affiliates, or Sublicensees shall use Confidential Information of the other Party for any purpose whatsoever except as expressly permitted in this Agreement or the License Agreement. 8.1.2 LIMITED DISCLOSURE. PTI and King each agree that any disclosure of the other Party's Confidential Information to any officer, employee, Consultant, agent, or Affiliate of PTI or King, as the case may be, shall be made only if and to the extent necessary to carry out its rights and responsibilities under this Agreement and the License Agreement, shall be limited to the maximum extent possible consistent with such rights and responsibilities, and shall only be made to persons who are bound by written confidentiality obligations to maintain the confidentiality thereof and not to use such Confidential Information except as expressly permitted by this Agreement or the License Agreement. PTI and King each further agrees not to disclose or transfer the other Party's Confidential Information to any Third Parties under any circumstance without the prior written approval from the other Party (such approval not to be unreasonably withheld), except as otherwise required by law, and except as otherwise expressly permitted by this Agreement or the License Agreement. Each Party shall take such action, and shall cause its Affiliates and Sublicensees to take such action, to preserve the confidentiality of the Disclosing Party's Confidential Information as the Receiving Party would customarily take to preserve the confidentiality of its own Confidential Information, using a level of care that shall not under any circumstances be less than reasonable and prudent care. If a court or other government authority orders that the Receiving Party disclose Confidential Information, or proposes such an order, the Receiving Party must notify the Disclosing Party immediately after learning of the order, so as to provide the Disclosing Party an opportunity to protect the information, and the Receiving Party must limit the disclosure to the minimum that will comply with the order. Each Party, upon the request of the other Party, will return all the Confidential Information disclosed or transferred to it by the other Party pursuant to this Agreement, including all copies and extracts of documents and all manifestations in whatever form, within 60 days of the request or, if earlier, the termination or expiration of this Agreement; provided however, that a Party may retain Confidential Information of the other Party relating to any license or right to use Technology that survives such termination and one copy of all other Confidential Information may be retained in inactive archives solely for the purpose of establishing the contents thereof. PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 24 8.1.3 EMPLOYEES AND CONSULTANTS. PTI and King each hereby agrees that all of its employees, and all of the employees of its Affiliates, and any Consultants to such Party or its Affiliates, in any case that participate in the activities of the Development Program and who shall have access to Confidential Information of the other Party shall be bound by written obligations to maintain the same in confidence and not to use such information except as expressly permitted herein. Each Party agrees to enforce confidentiality obligations to which its employees and Consultants (and those of its Affiliates) are obligated. Each Party agrees to have each employee or Consultant that participates in the Development Program enter into a written agreement with such Party that includes an assignment to such Party of all right, title, and interest in and to all work product and all inventions arising during the course of his or her employment with or provision of services to such Party, and all intellectual property rights attaching thereto. 8.1.4 EQUITABLE RELIEF. PTI and King each acknowledges that a breach by it of Article 7 or the provisions of this Article 8 cannot reasonably or adequately be compensated in damages in an action at law and that such a breach may cause the other Party irreparable injury and damage. By reason thereof, each Party agrees that the other Party may be entitled, in addition to any other remedies it may have under this Agreement or otherwise, to preliminary and permanent injunctive and other equitable relief to prevent or curtail any breach of Article 7 or 8 by the other Party; provided, however, that no specification in this Agreement of a specific legal or equitable remedy shall be construed as a waiver or prohibition against the pursuing of other legal or equitable remedies in the event of such a breach. Each Party agrees that the existence of any claim, demand, or cause of action of it against the other Party, whether predicated upon this Agreement, or otherwise, shall not constitute a defense to the enforcement by the other Party, or its successors or assigns, of the covenants contained in Articles 7 and 8. 8.2 PUBLICITY. Neither Party may publicly disclose the existence or terms of this Agreement without the prior written consent of the other Party. Notwithstanding the foregoing, each Party shall have the right to disclose the existence or terms of this Agreement, or information relating to the Development Program, Remoxy, or other Products, without the consent of the other Party (a) to the extent the disclosure is required by law or by the requirements of any nationally recognized securities exchange, quotation system, or over-the-counter market on which such Party has its securities listed or traded, (b) to any investors, prospective investors, lenders, and other potential financing sources who are obligated to keep such information confidential, or (c) to any Third Party who is obligated by written confidentiality agreement to keep such information confidential; provided, in each case, that the Party making such disclosure shall use reasonable efforts to provide the other Party with as much notice beforehand as is reasonable under the circumstances with respect to any such disclosure. The Parties, upon the execution of this Agreement, will mutually agree to a press release with respect to the Development Program for publication. Once such press release or any other written statement is approved for disclosure by both Parties, either Party may make subsequent public disclosure of the contents of such statement without the further approval of the other Party. Additionally from time-to-time PTI may wish to issue press releases or make similar disclosures regarding the results or status of its research or Product activities, the achievement of a regulatory or development milestone, or any other material achievements under this Agreement PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 25 or the DLA. Notwithstanding anything to the contrary in Section 8.3 or this Section 8.2, PTI shall be free to issue such press releases or make such disclosures, and shall have the right to choose the wording and timing of any such press releases and disclosures; provided that PTI agrees to provide King a draft copy of any such press release or disclosure at least twelve (12) hours prior to its publication or disclosure, which copy in any event must be provided during normal business hours, and provided further that such disclosure does not mention King without King's prior written consent. King shall have the right to inform PTI of any information contained therein that King believes is inaccurate. 8.3 PUBLICATION. It is expected that each Party may wish to publish the results of its research under this Agreement and the DLA in scientific journals or through scientific conferences, which disclosures will be subject to the obligations of this Section 8.3. At any time prior to the filing of an NDA for a particular Product, PTI may publish the results of its research for such Product in scientific journals or through scientific conferences; provided that PTI complies with the provisions of this Section 8.3; and provided further that such publication does not mention King without King's prior written consent. At any time following the filing of an NDA for a particular Product, King may publish the results of its research for such Product in scientific journals or through scientific conferences; provided that King complies with the provisions of this Section 8.3; and provided further that such publication does not mention PTI without PTI's prior written consent. In order to safeguard patent rights and other intellectual property, the Party wishing to publish in any scientific journal or at any scientific conference the results of any research being conducted by the Parties in the Development Program shall first submit a draft of each proposed technical publication or an outline of each proposed presentation for a scientific conference, with any related materials to be published or distributed in connection therewith, to the other Party for review, comment, and consideration of appropriate patent action at least thirty (30) days prior to any submission for publication (or in the case of a disclosure in connection with a scientific conference, at least fifteen (15) days prior to such disclosure). Within fifteen (15) days of receipt of the prepublication materials (or as soon as practicable in connection with an outline of an oral presentation), the other Party will notify the Party seeking publication as to whether a patent application shall be prepared and filed (in which case the Party seeking publication shall delay submission until the first to occur of the filing of a patent application and thirty (30) days from such notice provided by the JOC) or whether such publication must be revised to eliminate Confidential Information of a Party (in which case the Party seeking publication shall delete from any proposed publication all such Confidential Information contained therein). 9. TERM AND TERMINATION 9.1 TERM. This Agreement shall commence on the Closing Date and shall continue in full force and effect until the later of (a) the expiration of the last to expire of any Patent Rights licensed under the License Agreement or developed in the Collaboration and (b) the expiration of all periods of market exclusivity relating to any Products in the Territory, unless earlier terminated in accordance with the provisions of Section 6.1.2 or this Article 9 (the "Term"). PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 26 9.2 TERMINATION. This Agreement may be terminated, with respect to a particular Product or in whole, as follows: 9.2.1 MUTUAL TERMINATION. The Parties may agree in writing to mutually terminate this Agreement at any time. If a Party has given notice of termination of this Agreement pursuant to Section 9.2.2, 9.2.3, or 9.2.4 hereof, the other Party may not invoke this Section 9.2.1 by agreeing to such termination. In the event of termination pursuant to this Section 9.2.1, the Parties shall negotiate in good faith within thirty (30) days after the date of such termination the terms and conditions of such termination. In addition, King shall make payments due and payable for the Final Calendar Year as required by Sections 6.3 and 6.4, as well as pay any other amounts due and owing on the date of termination. 9.2.2 TERMINATION AT WILL. (a) Product Specific Termination. King may terminate this Agreement with respect to a particular Product as set forth in Section 3.1.4 above. In connection with a termination pursuant to this Section 9.2.2(a), the following shall apply: (i) King shall execute and deliver to PTI such documents, material, data, records, analyses, and information and do such things as reasonably requested by PTI to the extent reasonably related to the Development and Marketing of such Terminated Product in the Territory, including the following, in each case to the extent so related: (A) King shall use its commercially reasonable efforts to effect a reasonably smooth and orderly transition of any ongoing clinical studies, Regulatory Approval, or pre-marketing efforts to PTI (including all data and reports in the possession of King) with respect to the Terminated Product, including the assignment of any relevant Third Party contracts and Regulatory Filings and, unless otherwise requested by PTI, shall use commercially reasonable efforts to cancel all cancelable costs already incurred and mitigate all other costs incurred in connection with the Development Program for such Terminated Product; (B) King shall make its personnel and other resources reasonably available to PTI as reasonably necessary to effect a reasonably orderly transition of development responsibilities for such Terminated Product; (C) King shall pay all non-cancelable costs in connection with the Development Program for such Terminated Product; (D) King shall pay all costs of any of the ongoing clinical trials of such Terminated Product for a period of six (6) months from the effective date of termination, but only for such costs incurred for those patients already enrolled in the study at the time of giving the termination notice (it being understood that King shall continue to be liable beyond the end of such six (6)-month period for any non-cancelable costs associated with such clinical trials); (E) all rights and licenses granted herein to King with respect to the Terminated Product shall, for no additional consideration, immediately terminate; and (F) King shall, within ten (10) days after the termination date, provide and assign to PTI all clinical data, INDs, NDAs, Regulatory Approvals, Regulatory Filings, and all other documentation reasonably useful in respect of the Terminated Product in the Territory. Except as otherwise provided herein, all reasonable costs and expenses incurred with respect to the foregoing (except for non-cancelable costs as described in clause (C) above) will be borne by King for a period of six (6) months after the effective date of termination, unless the Parties otherwise agree. PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 27 (ii) The Parties shall make payments due and payable for the Final Calendar Year with respect to the Terminated Product as required by Sections 6.3 and 6.4, as well as pay any other amounts due and owing on the date of termination. (b) Termination of the Agreement in its Entirety. King may terminate this Agreement in its entirety upon six (6) months' prior written notice to PTI, which notice may be given (1) following the third anniversary of the Effective Date, or (2) in the event of Scientific Failure, with such termination to be effective at the end of such six (6)-month period. As used herein, "Scientific Failure" means a determination by the JOC that the Development Program is unlikely to be commercially viable, or is unlikely to generate any marketable Products, as determined in accordance with its business, legal, medical, and scientific judgment. In connection with a termination pursuant to this Section 9.2.2(b), the following shall apply: (i) King shall execute and deliver to PTI such documents, material, data, records, analyses, and information and do such things as reasonably requested by PTI to the extent reasonably related to the Development and Marketing of all Products in the Territory, including the following, in each case only to the extent so related: (A) King shall use its commercially reasonable efforts to effect a reasonably smooth and orderly transition of any ongoing clinical studies, Regulatory Approval, or pre-marketing efforts to PTI (including all data and reports in the possession of King) with respect to the Products, including the assignment of any relevant Third Party contracts and Regulatory Filings and, unless otherwise requested by PTI, shall use commercially reasonable efforts to cancel all cancelable costs already incurred and mitigate all other costs incurred in connection with the Development Program for all Products; (B) King shall make its personnel and other resources reasonably available to PTI as reasonably necessary to effect a reasonably orderly transition of development responsibilities for such Products; (C) King shall pay all non-cancelable costs in connection with the Development Program for such Products; (D) King shall pay all costs of any of the ongoing clinical trials of such Products for a period of six (6) months from the effective date of termination, but only for such costs incurred for those patients already enrolled in the study at the time of giving the termination notice (it being understood that King shall continue to be liable beyond the end of such six (6)-month period for any non-cancelable costs associated with such clinical trials); (E) all rights and licenses granted herein to King with respect to the Products shall, for no additional consideration, immediately terminate; and (F) King shall, within ten (10) days after the termination date, provide and assign to PTI all clinical data, INDs, NDAs, Regulatory Approvals, Regulatory Filings, and all other documentation reasonably useful in respect of the Products in the Territory. All reasonable costs and expenses incurred with respect to the foregoing (except for non-cancelable costs as described in clause (C) above) will be borne by King for a period of six (6) months after the effective date of termination, unless the Parties otherwise agree. In addition, King shall continue to pay the labor costs of PTI personnel at the FTE Rate for the number of hours of service called for in the budget then in effect, whether or not such PTI employees are providing such services, for a period of six (6) months after the effective date of termination; provided that, if a budget is not in effect for a portion of such six (6)-month period, the labor costs for such unbudgeted period will be paid for the number of hours of service set forth in the final approved budget pro-rated to the length of such unbudgeted period. Notwithstanding the PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 28 foregoing, King shall not be obligated to continue to pay such labor costs for such PTI personnel to the extent such PTI personnel are actually redeployed to other projects funded by a Third Party or are no longer employed by PTI. (ii) The Parties shall make payments due and payable for the Final Calendar Year with respect to the Products as required by Sections 6.3 and 6.4, as well as pay any other amounts due and owing on the date of termination. 9.2.3 TERMINATION FOR MATERIAL BREACH. In the event that either Party breaches any material term of this Agreement that applies to it, the other Party shall have the right to terminate this Agreement by giving sixty (60) days' prior written notice to the breaching Party; provided, however, that in the case of a breach capable of being cured, if the breaching Party shall cure the breach within such notice period after notice shall have been given, then such notice shall not be effective. For purposes of this Section 9.2.3, (i) the failure to timely make any payment or fulfill any funding obligation under this Agreement that is not subject to a bona fide dispute and (ii) the commission of any act or the occurrence of any omission, in each case that constitutes a breach of any material term of this Agreement shall each constitute a material breach of this Agreement (but the list set forth in clauses (i) and (ii) shall not be deemed an exhaustive list of material breaches of this Agreement). In the event of a termination pursuant to this Section 9.2.3, the following shall apply (the "Termination Procedures"): (a) In the event that PTI is the breaching Party, King shall execute and deliver to PTI such documents, material, data, records, analyses, and information and do such things as reasonably requested by PTI to the extent reasonably related to the Development and Marketing of the Products in the Territory, including the following, in each case to the extent so related: (i) King shall use its commercially reasonable efforts to effect a reasonably smooth and orderly transition of any ongoing clinical studies, Regulatory Approval, or pre-marketing efforts to PTI with respect to the Products (including all data and reports in the possession of King), including the assignment of any relevant Third Party contracts and Regulatory Filings and, unless otherwise requested by PTI, use commercially reasonable efforts to cancel all cancelable costs already incurred and mitigate all other costs incurred in connection with the Development Program; (ii) King shall make its personnel and other resources reasonably available to PTI as reasonably necessary to effect a reasonably orderly transition of development responsibilities for the Products; (iii) all rights and licenses granted herein to King with respect to the Products shall, for no additional consideration, immediately terminate; and (iv) King shall, within 10 days after the termination date, provide and assign to PTI all clinical data, INDs, NDAs, Regulatory Approvals, Regulatory Filings, and all other documentation reasonably useful in respect of the Products in the Territory. Except as otherwise provided herein, all reasonable costs and expenses incurred with respect to the foregoing will be borne by PTI, unless the Parties otherwise agree. (b) In the event that King is the breaching Party, King shall execute and deliver to PTI such documents, material, data, records, analyses, and information and do such things as reasonably requested by PTI to the extent reasonably related to the Development and Marketing of the Products in the Territory, including the following, in each case to the extent so related: (i) King shall use its commercially reasonable efforts to effect a reasonably smooth and orderly transition of any ongoing clinical studies, Regulatory Approval, or pre-marketing efforts to PTI with respect to the Products (including all data and reports in the possession of PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 29 King), including the assignment of any relevant Third Party contracts and Regulatory Filings and, unless otherwise requested by PTI, use commercially reasonable efforts to cancel all cancelable costs already incurred and mitigate all other costs incurred in connection with the Development Program; (ii) King shall make its personnel and other resources reasonably available to PTI as reasonably necessary to effect a reasonably orderly transition of development responsibilities for the Products; (iii) King shall pay all the costs for the completion of any of the ongoing clinical trials of Products, but only for such costs directly incurred for those patients already enrolled in the study at the time of giving the termination notice, as well as all other non-cancelable costs in connection with the Development Program for the Products; (iv) all rights and licenses granted herein to King with respect to the Products shall, for no additional consideration, immediately terminate; and (v) King shall, within 10 days after the termination date, provide and assign to PTI all clinical data, INDs, NDAs, Regulatory Approvals, Regulatory Filings, and all other documentation reasonably useful in respect of the Products in the Territory. Except as otherwise provided herein, all reasonable costs and expenses incurred with respect to the foregoing will be borne by King, unless the Parties otherwise agree. In addition, King shall continue to pay the labor costs of PTI personnel at the FTE Rate for the number of hours of service called for in the budget then in effect, whether or not such PTI employees are providing such services, for a period of six (6) months after the effective date of termination; provided that, if a budget is not in effect for a portion of such six (6)-month period, the labor costs for such unbudgeted period will be paid for the number of hours of service set forth in the final approved budget pro-rated to the length of such unbudgeted period. Notwithstanding the foregoing, King shall not be obligated to continue to pay such labor costs for such PTI personnel to the extent such PTI personnel are actually redeployed to other projects funded by a Third Party or are no longer employed by PTI. (c) The Parties shall make payments due and payable for the Final Calendar Year as required by Sections 6.3 and 6.4, as well as pay any other amounts due and owing on the date of termination. 9.2.4 TERMINATION FOR INSOLVENCY. In the event that a Party (a) makes an assignment for the benefit of creditors, (b) appoints or suffers appointment of a receiver or trustee over its property, (c) is generally unable to pay its debts as they become due, (d) files a petition under, or invokes the protection of, any bankruptcy, insolvency, or similar laws, and consent is requested but not granted for an assignment of the Agreement under Section 9.4.1(c) hereof, (e) has a petition or proceeding filed against it under any bankruptcy, insolvency, or similar laws, which is not dismissed within sixty (60) days, and consent is requested but not granted for an assignment of the Agreement under Section 9.4.1(c) hereof, or (f) suspends, closes, or otherwise ceases to operate a majority of its business relating to this Agreement and the License Agreement, then the other Party may terminate this Agreement effective immediately upon written notice to the first Party. In the event of a termination pursuant to this Section 9.2.4, the Termination Procedures shall apply, with the terminating Party treated as the non-breaching Party. Nothing in this Section 9.2.4 limits or affects any other rights, elections, or remedies that the terminating Party may have under the Bankruptcy Code, or other Applicable Law and all such rights, elections, and remedies are expressly reserved. 9.2.5 REQUIRED ASSIGNMENTS. If a Party is required by the terms of this Agreement to assign or transfer to the other Party any agreement, document, or right and such PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 30 Party, after utilizing the level of efforts required hereunder, is unable to do so as the result of forces beyond its reasonable control, then the Party shall use its commercially reasonable efforts to make available to the other Party the material benefits of such agreement, document, or right in lieu of such assignment or transfer. 9.3 SURVIVING PROVISIONS. Termination and expiration of this Agreement for any reason shall be without prejudice to: (a) the following provisions, which shall survive termination or expiration of this Agreement for as long as necessary to permit their full discharge: Sections 5.1, 6.4.3, 8.1, 11.1, 11.2, 11.3, 11.5 and 11.6; Sections 9.2.2(b)(i) and 9.2.2(b)(ii) in the event of a termination by King pursuant to Section 9.2.2(b); Sections 9.2.3(b) and 9.2.3(c) in the event of a termination by PTI pursuant to Section 9.2.3, 9.2.4 or 9.4.3; Sections 9.2.3(a) and 9.2.3(c) in the event of a termination by King pursuant to Section 9.2.3, 9.2.4 or 9.4.3; the obligations of the Parties set forth in the first two sentences of Section 8.2; Articles 12 and 13; and the definitions set forth in Annex A; additionally, in the event of termination of this Agreement for any reason, King's reporting obligations under Section 4.2.1 with respect to adverse event information and product complaint information shall survive; provided that King shall provide such information directly to the PTI rather than to the JOC, and (b) any other rights or remedies provided at law or equity that either Party may otherwise have against the other. Except as otherwise provided in this Section 9.3, all rights and obligations of the Parties under this Agreement shall terminate upon the expiration or termination of this Agreement; provided that it is expressly understood that nothing herein shall relieve any Party from liability from any breach of any covenant or agreement of such Party contained herein or any willful or intentional breach of any representation or warranty of such Party contained herein. 9.4 TREATMENT UPON BANKRUPTCY. 9.4.1 ASSUMPTION AND ASSIGNMENT OF AGREEMENT. (a) Notwithstanding any other provision of this Agreement, the License Agreement, or any other related agreements, each Party hereby consents to the assumption of this Agreement by the other Party (the "Debtor Party") in any case commenced by or against the Debtor Party under the Bankruptcy Code to the extent that such consent is required under Section 365(c)(1) of the Bankruptcy Code, but only if the Debtor Party is otherwise entitled to assume this Agreement under the applicable requirements of the Bankruptcy Code. The sole purpose of the foregoing consent is to overcome any restriction potentially imposed by Section 365(c)(1) of the Bankruptcy Code on the Debtor Party's assumption of this Agreement in a bankruptcy case concerning the Debtor Party. It is not intended to limit any other rights of the other Party (the "Non-Debtor Party") under this Agreement or any provision of the Bankruptcy Code, including Section 365(c)(1). The foregoing consent applies only to the assumption of this Agreement by the Debtor Party and does not apply to the Debtor Party's assignment of this Agreement or any rights hereunder to a Third Party. PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 31 (b) Notwithstanding any other provision of this Agreement (including Sections 9.4.1(c) and 13.9), the License Agreement, or any other related agreements, the Non-Debtor Party hereby consents to the assignment of this Agreement by the Debtor Party to a Third Party solely in connection with a sale of all or substantially all of the Debtor Party's business or assets relating to this Agreement and the License Agreement to such Third Party, pursuant to an orderly sale process under Section 363 of the Bankruptcy Code or a confirmed plan under Section 1129 of the Bankruptcy Code, that contemplates the continued operation of the purchased business or assets and, if PTI is the Debtor Party, the retention of the Existing Management Team, provided that such Third Party promptly agrees in writing to be bound by the terms and conditions of this Agreement and the Debtor Party is otherwise entitled to assign this Agreement under the applicable requirements of the Bankruptcy Code. The sole purpose of the foregoing consent is to overcome any restriction potentially imposed by Section 365(c)(1) of the Bankruptcy Code on the Debtor Party's assignment of this Agreement under the specific circumstances described in this Section 9.4.1(b). It is not intended to limit any other rights of the Non-Debtor Party under this Agreement or any provision of the Bankruptcy Code, including Section 365(c)(1), or to apply to the assignment of this Agreement in any other context. (c) Notwithstanding any other provision of this Agreement (including Section 13.9), the License Agreement, or any other related agreements, but subject to Section 9.4.1(b) above, the Debtor Party may only assign this Agreement to a Third Party in any case commenced by or against it under the Bankruptcy Code with the prior written consent of the Non-Debtor Party. 9.4.2 INTELLECTUAL PROPERTY RIGHTS. All rights related to and licenses of intellectual property granted under this Agreement and the License Agreement by one Party to the other Party are, and shall otherwise be deemed to be, for purposes of Section 365(n) of the Bankruptcy Code, licenses of rights to "intellectual property" as defined under Section 101(35A) of the Bankruptcy Code. In addition to any other rights, elections, and remedies under this Agreement, any related agreements, the Bankruptcy Code, or any other Applicable Law, upon a written request under Section 365(n) of the Bankruptcy Code, the Non-Debtor Party shall be entitled to complete access to any intellectual property of the Debtor Party pertaining to the rights granted in the licenses under the License Agreement, all embodiments of such intellectual property and all documents, material, data, records, analyses, and information related thereto (including all clinical data, INDs, NDAs, Regulatory Approvals, Regulatory Filings, and all other documentation reasonably useful in respect of Product in the Territory in the Field). This Agreement and any other related agreements (to the extent such agreements do not constitute licenses of intellectual property under the Bankruptcy Code) shall be considered agreements supplementary (as such term is used in Section 365(n) of the Bankruptcy Code) to the License Agreement and any other intellectual property licenses between the Parties. 9.4.3 REJECTION IN BANKRUPTCY. Any rejection of this Agreement by the Debtor Party pursuant to Section 365 of the Bankruptcy Code shall constitute a material breach of this Agreement not subject to notice or cure. Upon any such rejection, (a) all rights, elections, and remedies of the Non-Debtor Party to this Agreement (including under Section 365 of the Bankruptcy Code) are expressly reserved, and (b) in the event that this Agreement is deemed terminated upon or subsequent to such rejection, the Termination Procedures shall apply, with the Non-Debtor Party treated as the non-breaching Party. Further, upon any such rejection, the PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 32 Parties intend and agree that the Non-Debtor Party may elect to retain its rights under this Agreement pursuant to Section 365(n) of the Bankruptcy Code and that such election shall, among other things, entitle the Non-Debtor Party to invoke and exercise all of its rights to any intellectual property under this Agreement, the License Agreement, and any other related agreements. 9.5 DAMAGES; RELIEF. Termination of this Agreement shall not preclude any Party from claiming any other damages, compensation, or legal or equitable relief that it may be entitled to upon such termination. 9.6 TAX TREATMENT. The Parties intend that, for United States federal income tax purposes and all other applicable state, local, and foreign income or franchise taxes as may be permitted by law, the Collaboration shall be treated as a cost sharing arrangement between the Parties and shall not be treated as a partnership. The Parties agree that, to the extent permitted by law, they will report their participation in the Collaboration in accordance with the foregoing. 10. REPRESENTATIONS AND WARRANTIES 10.1 BY EACH PARTY. PTI and King each represents and warrants to the other as of the Effective Date as follows: (a) Organization. It is a corporation duly organized, validly existing and is in good standing under the laws of the jurisdiction of its organization, is qualified to do business and is in good standing as a foreign corporation in each jurisdiction in which the performance of its obligations hereunder requires such qualification, and, except as would not have a material adverse effect on the ability of the Party to perform its obligations hereunder, has all requisite power and authority, corporate or otherwise, to conduct its business as now being conducted, to own, lease, and operate its properties and to execute, deliver, and perform this Agreement. (b) Authorization and Right to Grant Licenses. The execution, delivery, and performance by it of this Agreement have been duly authorized by all necessary corporate action and do not and will not (i) require any consent or approval of its stockholders or (ii) violate any provision of any agreement, law, rule, regulation, order, writ, judgment, injunction, decree, determination, or award presently in effect having applicability to it or any provision of its charter documents. Each Party has the right, power, and authority to grant licenses granted by it hereunder. (c) Binding Agreement. This Agreement is a legal, valid, and binding obligation of it, enforceable against it in accordance with its terms and conditions, except as enforceability may be limited by bankruptcy, insolvency, or other laws affecting the enforcement of creditors' rights generally, and except that the availability of the remedy of specific performance or other equitable relief is subject to the discretion of the court before which any proceeding therefor may be brought. (d) No Inconsistent Obligation. It is not under any obligation to any person or entity, contractual or otherwise, that is conflicting or inconsistent in any respect with the terms of this Agreement, and it has all power and authority under all instruments or agreements to which it is a Party to enter into this Agreement and to perform its obligations hereunder. PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 33 (e) Absence of Actions. To its Knowledge, it is not a party to or object of any litigation, suit, legal claim, action, proceeding, judgment, settlement, or investigation (an "Action") pending or threatened against it, or any of its Affiliates, or any of its properties or assets, before any governmental authority or Regulatory Authority that might reasonably be expected to have a material adverse effect on its ability to diligently and completely fulfill its obligations hereunder. A material breach of or inaccuracy in this Section 10.1(e) with respect to a Party shall constitute a material breach of this Agreement by such Party pursuant to Section 9.2.3. (f) Applicable Law. It has complied with and shall continue to comply with and shall perform all its duties and obligations hereunder in accordance with all Applicable Law. (g) Debarment. As of the date hereof, neither it nor any of its respective employees or agents, in their capacity as such, have been disqualified or debarred by the FDA, pursuant to 21 U.S.C. Section 335(a) or (b), or been charged with or convicted under any Applicable Law of the United States for conduct relating to the development or approval, or otherwise relating to the regulation of any Product under the Generic Drug Enforcement Act of 1992, or any other relevant law, rule, or regulation or been disbarred, disqualified, or convicted under or for any equivalent or similar applicable foreign law, rule, or regulation. 10.2 BY PTI. PTI further represents and warrants to King as of the Effective Date as follows: (a) Clinical Trials. All pre-clinical and clinical work, studies, and trials conducted, supervised, or monitored by PTI with respect to any Designated Product and that are intended to be used to support Regulatory Approval, have, to the Knowledge of PTI, been conducted and performed in substantial compliance with Applicable Laws, including Good Laboratory Practice, Good Clinical Practice, and Good Manufacturing Practice requirements and ICH Guidelines. PTI has, or, as applicable, any Third Parties with whom PTI has contracted to perform any clinical trials or modifications thereto with respect to any Designated Product has, to the Knowledge of PTI, obtained and maintained any necessary IRB approvals of clinical trials or modifications thereto sponsored by PTI. To the Knowledge of PTI, in no clinical trial sponsored, conducted, supervised, or monitored by PTI with respect to any Designated Product has any IRB, ethics committee, or European competent authority approval ever been suspended, terminated, put on clinical hold, or voluntarily withdrawn. (b) Disclosure. To PTI's Knowledge, no employees or agents of PTI have made an untrue statement of material fact on behalf of PTI to any Regulatory Authority with respect to any product in the Field or failed to disclose a material fact required to be disclosed to any Regulatory Authority with respect to any product in the Field that at the time such disclosure was made, could reasonably be expected to (i) provide a basis for the FDA or any other Regulatory Authority to invoke its policy respecting Fraud, Untrue Statements of Material Facts, Bribery, and Illegal Gratuities, set forth in 56 Fed. Reg. 46191 (September 10, 1991) or any similar policy or (ii) otherwise materially adversely affect the prospect of, or materially delay the obtaining of, Regulatory Approval for such product. PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 34 (c) Intellectual Property. To the actual knowledge of Remi Barbier, Nadav Friedmann, Michael Zamloot, Grant Schoenhard, and Peter Roddy, the manufacture, use, offer for sale, sale, or importation of the Designated Products (provided that King acknowledges PTI has not conducted any patent search with regard to hydrocodone), in each case as such Designated Product is specifically formulated, will not infringe or misappropriate the intellectual property rights of any Third Party as of the Effective Date, specifically excluding from such representation and warranty the patents that have been identified by patent number to King prior to the Effective Date (it being acknowledged by King that PTI has not conducted, among other things, a comprehensive analysis of the other family members of the patent families to which such identified patents belong); provided, however, that with regard to infringement or misappropriation of the intellectual property rights of a Third Party arising from the utilization of the Saber Technology with regard to any such Designated Product (the "Saber Infringement"), King acknowledges and agrees that the foregoing representation by PTI with respect to the Saber Infringement is based solely on the representation and warranty received by PTI from Durect with regard to the infringement of Third Party intellectual property rights pursuant to the DLA, and PTI shall have no liability to King with regard to any Saber Infringement beyond the amount of damages or any other remedy that PTI shall receive from Durect as a result of such breach. (d) No Omissions. No representation or warranty of PTI contained in this Agreement or the License Agreement, and no written information previously provided by PTI to King in connection with the transactions contemplated hereby, including any representation, warranty, or information relating to any pre-clinical, clinical, manufacturing, or regulatory issues concerning any Designated Product, contains any untrue statement of a Material Fact or omits to state a Material Fact actually known to PTI and which would be necessary in order to make the statements contained herein or therein not misleading in light of the circumstances under which they were made. For purposes of this representation and warranty, King shall be deemed to be on notice and to have received disclosures of the following information: (i) with respect to PTI, information publicly available through PTI's filings with the Securities and Exchange Commission and the publications listed on Schedule 10.2(d)(i) attached hereto, and, (ii) with respect to Durect, information publicly available through Durect's filings with the Securities and Exchange Commission and the publications listed on Schedule 10.2(d)(ii) attached hereto as well as any peer-reviewed publications in English generally available to the public regarding the subject matter of this Agreement (including Remoxy and the SABER Technology) and written by the individuals set forth on Schedule 10.2(d)(ii). As used in this Section 10.2(d), a "Material Fact" means a fact that would have a materially adverse effect on the commercial prospects for products in the Field in the Territory taken as a whole. 11. INDEMNIFICATION 11.1 INDEMNIFICATION OF KING BY PTI. PTI shall indemnify, defend, and hold harmless King, its Affiliates, and their respective directors, officers, employees, and agents (the "King Indemnitees"), against any liability, damage, loss, or expense (including reasonable attorneys' fees and expenses of litigation) (collectively, "Losses") incurred by or imposed upon the King Indemnitees, or any one of them, as a result of claims, causes of action, suits, actions, PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 35 demands, or judgments made against such King Indemnitees by Third Parties, including claims for personal injury and claims of suppliers and PTI employees (except in cases where such claims, suits, actions, demands, or judgments result from a material breach by King of its representations or warranties under this Agreement, gross negligence, or willful misconduct on the part of King), in each case to the extent arising out of (a) the breach of any representation or warranty of PTI under Article 10 hereof, (b) the gross negligence or willful misconduct of PTI, its Affiliates, or their respective employees or agents in the performance of any obligation under this Agreement, and (c) any government funding received by PTI prior to the Effective Date in connection with the research or development of any Products or any subject matter disclosed in any PTI Patent Rights, including pursuant to any grants from the National Institutes of Health, and the failure of PTI to comply in all material respects with the terms and conditions of such funding agreements and grants, and with all Applicable Laws with respect thereto, including to obtain any necessary permits or waivers thereunder. For purposes of clarity, it is understood and agreed that, except as provided in this Section 11.1 or in Section 9.1 of the License Agreement, PTI provides no indemnification to King with respect to product liabilities claims relating to Products. 11.2 INDEMNIFICATION OF PTI BY KING. King shall indemnify, defend, and hold harmless PTI, its Affiliates, and their respective directors, officers, employees, and agents (the "PTI Indemnitees"), against any Losses incurred by or imposed upon the PTI Indemnitees, or any one of them, as a result of claims, causes of action, suits, actions, demands, or judgments made against such PTI Indemnitees by Third Parties, including personal injury and claims of suppliers and King employees (except in cases where such claims, suits, actions, demands, or judgments result from a material breach by PTI of its representations or warranties under this Agreement, gross negligence, or willful misconduct on the part of PTI), in each case to the extent arising out of (a) the breach of any representation or warranty of King under Article 10 hereof and (b) the gross negligence or willful misconduct of King, its Affiliates, or their respective employees or agents in the performance of any obligation under this Agreement. For purposes of clarity, it is understood and agreed that, except as provided in this Section 11.2 or in Section 9.2 of the License Agreement, King provides no indemnification to PTI with respect to product liabilities claims relating to Products. 11.3 CONDITIONS TO INDEMNIFICATION. A Party seeking indemnification under this Article 11 (the "Indemnified Party") shall give prompt notice of the claim to the other Party (the "Indemnifying Party") and, provided that the Indemnifying Party is not contesting the indemnity obligation, shall permit the Indemnifying Party to control any litigation relating to such claim and disposition of any such claim. The Indemnifying Party shall act reasonably and in good faith with respect to all matters relating to the settlement or disposition of any claim as the settlement or disposition relates to Parties being indemnified under this Article 11. The Indemnifying Party shall not settle or otherwise resolve any claim without prior notice to the Indemnified Party and the consent of the Indemnified Party (which consent shall not be unreasonably withheld, conditioned, or delayed) if such settlement involves anything other than the payment of money by the Indemnifying Party. The Indemnified Party shall reasonably cooperate with the Indemnifying Party in its defense of any claim for which indemnification is sought under this Article 11 and shall have the right to be present in person or through counsel at all legal proceedings giving rise to the right of indemnification. For purposes of clarity, it is understood that in the event that a claim is eligible for indemnification under both this Article 11 and under PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 36 Article 9 of the License Agreement, the Indemnified Party shall be entitled to seek indemnification for such claim under either this Agreement or the License Agreement, but not both. 11.4 INSURANCE. In addition to the insurance coverages required by Section 5.1 hereof, each Party shall obtain other insurance coverage from first class insurers in types and amounts commensurate with industry standards for such Party's activities hereunder. 11.5 WARRANTY DISCLAIMER. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS AGREEMENT OR THE LICENSE AGREEMENT, NEITHER PARTY MAKES ANY WARRANTY WITH RESPECT TO ANY TECHNOLOGY, GOODS, SERVICES, RIGHTS, OR OTHER SUBJECT MATTER OF THIS AGREEMENT AND HEREBY DISCLAIMS WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, AND NONINFRINGEMENT WITH RESPECT TO ANY AND ALL OF THE FOREGOING. NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS AGREEMENT, NEITHER PARTY MAKES ANY GUARANTEES TO THE OTHER CONCERNING THE SUCCESS OR POTENTIAL SUCCESS OF THE ACTIVITIES CONTEMPLATED UNDER THIS AGREEMENT. 11.6 LIMITED LIABILITY. EXCEPT WITH RESPECT TO A BREACH OF THE OBLIGATIONS IN ARTICLE 8 OR WITH RESPECT TO AMOUNTS PAID TO THIRD PARTIES UNDER THE INDEMNIFICATION OBLIGATIONS OF THIS ARTICLE 11, NEITHER PTI NOR KING WILL BE LIABLE WITH RESPECT TO ANY SUBJECT MATTER OF THIS AGREEMENT UNDER ANY CONTRACT, NEGLIGENCE, STRICT LIABILITY, OR OTHER LEGAL OR EQUITABLE THEORY FOR (I) ANY INDIRECT, INCIDENTAL, CONSEQUENTIAL, OR PUNITIVE DAMAGES OR (II) COST OF PROCUREMENT OF SUBSTITUTE GOODS, TECHNOLOGY, OR SERVICES. 12. REMEDIES Subject to the terms of this Agreement, the Parties are not excluded from exercising or seeking any and all rights and remedies available, in law or in equity, under Applicable Law. 13. MISCELLANEOUS 13.1 NOTICES. All notices or other communications that shall or may be given pursuant to this Agreement shall be in writing and shall be deemed to be effective (a) simultaneously with the transmission or delivery thereof, if sent by facsimile transmission (followed by hard copy by mail), (b) when delivered, if sent by United States registered or certified mail, return receipt requested, or (c) on the next business day, if sent by overnight courier, in each case to the Parties at the following addresses (or at such other addresses as shall be specified by like notice) with postage or delivery charges prepaid: PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 37 If to King: If to PTI: King Pharmaceuticals, Inc. Pain Therapeutics, Inc. 501 Fifth Street 416 Browning Way Bristol, Tennessee 37620 South San Francisco, California 94080 Tel.: (423) 989-8000 Tel.: (650) 825-3342 Fax: (423) 990-2566 Fax: (650) 624-8222 Attention: General Counsel Attention: President & CEO With a copy to: With a copy to: King Pharmaceuticals, Inc. Wilson Sonsini Goodrich & Rosati 501 Fifth Street 650 Page Mill Road Bristol, Tennessee 37620 Palo Alto, California 94304-1050 Tel.: (423) 989-8000 Tel.: (650) 493-9300 Fax: (423) 274-2602 Fax: (650) 493-6811 Attention: Business Development Attention: Michael O'Donnell 13.2 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without regard to the application of principles of conflicts of law. 13.3 BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of the Parties and their respective legal representatives, successors, and permitted assigns. 13.4 COUNTERPARTS. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original. 13.5 AMENDMENT; WAIVER. This Agreement may be amended, modified, superseded, or canceled, and any of the terms may be waived, only by a written instrument executed by each Party or, in the case of waiver, by the Party or Parties waiving compliance. The delay or failure of any Party at any time or times to require performance of any provisions shall in no manner affect the rights at a later time to enforce the same. No waiver by any Party of any condition or of the breach of any term contained in this Agreement, whether by conduct, or otherwise, in any one or more instances, shall be deemed to be, or considered as, a further or continuing waiver of any such condition or of the breach of such term or any other term of this Agreement. 13.6 NO THIRD PARTY BENEFICIARIES. No Third Party, including any employee of any Party to this Agreement, shall have or acquire any rights by reason of this Agreement. 13.7 PURPOSES AND SCOPE. The Parties hereto understand and agree that this Development Program is limited solely to the Field in the Territory, and to the activities, rights, and obligations as set forth in this Agreement. Nothing in this Agreement shall be construed (a) to create or imply a general partnership between the Parties, (b) to make either Party the agent of the other for any purpose, (c) to alter, amend, supersede, or vitiate any other arrangements between the Parties with respect to any subject matters not covered hereunder, (d) to give either Party the right to bind the other, (e) to create any duties or obligations between the Parties except as expressly set forth herein, or (f) to grant any direct or implied licenses or any other right other than as expressly set forth herein. 13.8 PERFORMANCE BY AFFILIATES. Each Party shall have the right to direct its wholly-owned Affiliates to act in satisfaction of such Party's or Affiliate's obligations hereunder or make an assignment to an Affiliate in accordance with Section 13.9; provided that such Party shall remain liable and fully responsible for the performance of such Affiliate hereunder. PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 38 13.9 ASSIGNMENT AND SUCCESSORS. Neither this Agreement nor any obligation of a Party hereunder may be assigned by either Party without the consent of the other, except that, subject to Section 9.4.1, each Party may assign this Agreement and the rights, obligations, and interests of such Party, in whole or in part, to any of its Affiliates (subject to Section 13.8) or to any Third Party that succeeds to all or substantially all of a Party's business or assets relating to this Agreement and the License Agreement, whether by sale, merger, operation of law, or otherwise; provided that such assignee or transferee promptly agrees in writing to be bound by the terms and conditions of this Agreement. Any attempted assignment in violation of this Section 13.9 shall be null, void, and of no effect. This Agreement shall be binding upon and inure to the benefit of all permitted successors-in-interest and assigns. 13.10 FORCE MAJEURE. In the event of the occurrence of a Force Majeure Event, the Parties shall not be deemed in breach of their obligations to the extent of the Force Majeure Event. The Party affected thereby shall use reasonable efforts to cure or overcome the same and resume performance of its obligations hereunder. 13.11 INTERPRETATION. (a) The Parties hereto acknowledge and agree that: (i) each Party and its counsel reviewed and negotiated the terms and provisions of this Agreement and have contributed to its revision; (ii) the rule of construction to the effect that any ambiguities are resolved against the drafting Party shall not be employed in the interpretation of this Agreement; and (iii) the terms and provisions of this Agreement shall be construed fairly as to all Parties hereto and not in a favor of or against any Party, regardless of which Party was generally responsible for the preparation of this Agreement. (b) The headings contained in this Agreement are for reference purposes only and will not affect in any way the meaning or interpretation of this Agreement. Whenever the words "include," "includes," or "including" are used in this Agreement, they will be deemed to be followed by the words "without limitation." Unless the context otherwise requires, (i) "or" is disjunctive but not necessarily exclusive, (ii) words in the singular include the plural and vice versa, and (iii) the use in this Agreement of a pronoun in reference to a Party hereto includes the masculine, feminine, or neuter, as the context may require. The Annex, Schedules, and Exhibits hereto will be deemed part of this Agreement and included in any reference to this Agreement. 13.12 INTEGRATION; SEVERABILITY. This Agreement and the License Agreement, when executed, are the sole agreements with respect to the subject matter hereof and supersede all other agreements and understandings between the Parties with respect to same. If any provision of this Agreement (including the temporal and substantive scope of the restrictions set forth in Article 7) is or becomes invalid or is ruled invalid by any court of competent jurisdiction or is deemed unenforceable, such provision or portion thereof will be modified or deleted in such a manner so as to make this Agreement, as modified, legal and enforceable to the fullest extent permitted under Applicable Law, and it is the intention of the Parties that the remainder of the Agreement shall not be affected. PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 39 13.13 FURTHER ASSURANCES. Each of PTI and King agrees to duly execute and deliver, or cause to be duly executed and delivered, such further instruments and do and cause to be done such further acts and things, including the filing of such additional assignments, agreements, documents, and instruments, that may be necessary or as the other Party hereto may at any time and from time to time reasonably request in connection with this Agreement or to carry out more effectively the provisions and purposes of, or to better assure and confirm unto such other Party its rights and remedies under, this Agreement. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 40 IN WITNESS WHEREOF, the Parties have caused this Collaboration Agreement to be executed by their duly authorized representatives as of the Effective Date. PAIN THERAPEUTICS, INC. By: /s/ Remi Barbier ------------------------------------ Name: Remi Barbier Title: President & CEO KING PHARMACEUTICALS, INC. By: /s/ Brian A. Markison ------------------------------------ Name: Brian A. Markison Title: President and Chief Executive Officer PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. ANNEX A DEFINITIONS TO COLLABORATION AGREEMENT 1. "AAA" has the meaning set forth in Section 2.3.3 of this Agreement. 2. "ACTION" has the meaning set forth in Section 10.1(e) of this Agreement. 3. "AFFILIATE" means any corporation, firm, partnership, or other entity that directly or indirectly controls or is controlled by or is under common control with a Party to this Agreement. For purposes of this definition, "control" means ownership, directly or through one or more Affiliates, of (a) 50% or more of the shares or voting rights in the case of a corporation or limited company, (b) 50% or more of the shares of stock entitled to vote for the election of directors, in the case of a corporation, (c) 50% or more of the equity or controlling interests in the case of any other type of legal entity (including joint ventures) or status as a general partner in any partnership, or (d) any other arrangement whereby a Party controls or has the right to control the Board of Directors or equivalent governing body of an entity. 4. "AGREEMENT" means this Collaboration Agreement, including all attached exhibits, schedules and annexes, as well as all amendments, supplements, and restatements thereof. 5. "API" means, with respect to a Product, the active pharmaceutical ingredient used in the Product. 6. "APPLICABLE LAW" means applicable U.S. and foreign laws, rules, regulations, guidelines, and standards, including those of the FDA and comparable foreign Regulatory Authorities. 7. "BANKRUPTCY CODE" means the U.S. Bankruptcy Code, 11 U.S.C. Sections 101 et seq. 8. "CALENDAR QUARTER" means, with respect to the first such Calendar Quarter, the period beginning on the Closing Date and ending on the last day of the calendar quarter within which the Closing Date falls and, thereafter, each successive period of three consecutive calendar months ending on March 31, June 30, September 30, or December 31. In the event that the termination of this Agreement does not fall on the last day of a Calendar Quarter, the "FINAL CALENDAR QUARTER" shall mean the period from the last day of the most recent Calendar Quarter through the applicable date of termination of this Agreement. 9. "CALENDAR YEAR" means each successive twelve (12)-month period commencing on January 1 and ending on December 31; provided that the first such Calendar Year shall begin on the Closing Date and end on December 31, 2005. In the event that the termination of this Agreement does not fall on the last day of a Calendar Year, the "FINAL CALENDAR YEAR" shall mean the period from the last day of the most recent Calendar Year through the applicable date of termination of this Agreement. 10. "CLAIMS" has the meaning set forth in Section 5.1 of this Agreement. PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. Annex A-1 11. "CLOSING" shall mean, subject to the satisfaction or waiver of the conditions set forth in Section 6.1.3 of this Agreement, the closing of the transactions contemplated by this Agreement. 12. "CLOSING DATE" shall mean the earlier of: (a) the third day, unless the first day falls on a weekend or holiday, in which case it shall be the next business day, after the expiration or termination of all applicable waiting periods under the HSR Act and the satisfaction of all the other conditions set forth in Section 6.1.3 of this Agreement or (b) the third day, unless the first day falls on a weekend or holiday, in which case it shall be the next business day, after the joint determination (by certification from each Party to the other) that notification under the HSR Act is not required and the satisfaction of all the other conditions set forth in Section 6.1.3 of this Agreement. 13. "CMC" means, with respect to a Product, the chemistry, manufacturing, and controls information that would typically be, or is, included in an IND or NDA for such Product. 14. "CO-CHAIRMAN" has the meaning set forth in Section 2.1 of this Agreement. 15. "COLLABORATION" means the association of PTI and King established pursuant to this Agreement for the purpose of conducting the Development of Products so as to accomplish the Development objectives of the Development Program. 16. "COLLABORATION COSTS" means the sum of each of the following costs incurred by or on behalf of a Party in fulfilling its responsibilities under the Development Program in accordance with the Program Plans for such Product, which costs must be documented and supported, calculated in accordance with Sections 3.3.2 and 3.7 of this Agreement, and included in the budget of a Program Plan or otherwise approved by King: (a) all out-of-pocket costs, including amounts paid to Durect for materials and services PTI is obligated to obtain from Durect under the DLA and any capital expenses for equipment purchased for purposes of fulfilling PTI's obligations under the Agreement (provided that the cumulative costs for such capital equipment shall not exceed [***] and provided further that King shall have title to any such capital equipment which it funds); (b) all internal labor costs incurred by a Party in connection with its research employees dedicated to providing services relating to a Product, such costs to be calculated by multiplying the Hourly FTE Rate by the total number of hours expended by such Party's personnel in performance of such services; provided that no time of PTI's Chief Executive Officer, Chief Financial Officer, or any administrative personnel of PTI will be billed to the Collaboration; and (c) any other costs expressly provided for in this Agreement or a Project Plan. Except to the extent this Agreement expressly provides for payments that do not require such approval, and except to the extent King has approved any payment hereunder, neither Party shall (i) be obligated to incur any costs or expend any funds that have not been approved by such Party or (ii) have the authority to cause the other Party to incur any costs or expend any funds that have PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. Annex A-2 not been approved by such other Party. Notwithstanding anything to the contrary contained herein, Collaboration Costs shall not include (A) except to the extent included in the FTE Rate, indirect costs, overhead, general, and administrative costs and other similar costs of a Party, or (B) any costs that relate to the business of a Party as a whole without specifically relating to a Product. In calculating the Collaboration Costs, the following principles shall apply: (1) there shall be no double counting of any costs or expenses or of any revenues; (2) when allocating costs and expenses under this Agreement, each Party shall utilize the same policies and principles as it utilizes consistently within its group and business units when making internal cost allocations; and (3) all costs and expenses shall be determined, and all calculations shall be made, in accordance with GAAP. 17. "COMPLETION OF PHASE II" means completion of the final statistical results of clinical trials that collectively evaluate the safety and efficacy of a Product's specific dosage strength in an indication the Product is intended to treat, which data enables the Parties to proceed with pivotal registration Phase III studies, without any objection from the FDA, as documented by FDA contact reports. For the avoidance of doubt, the "Completion of Phase II" for each Product in the Collaboration shall be independent events. 18. "CONFIDENTIAL INFORMATION" means all information, Technology, and Proprietary Materials that are disclosed to a Party (the "Receiving Party") by or on behalf of the other Party (the "Disclosing Party") hereunder or under the License Agreement or disclosed to any of the Receiving Party's employees, Consultants, Affiliates, or Sublicensees, except to the extent that any such information (a) as of the date of disclosure is known to the Receiving Party or its Affiliates, as demonstrated by credible written documentation; (b) as of the date of disclosure is in, or subsequently enters, the public domain, through no fault or omission of the Receiving Party; (c) is obtained from a Third Party having a lawful right to make such disclosure free from any obligation of confidentiality to the Disclosing Party; or (d) is independently developed by or for the Receiving Party without reference to or reliance upon any Confidential Information of the Disclosing Party as demonstrated by credible written documentation. It is further agreed that PTI Technology shall be deemed the Confidential Information of PTI, King Technology shall be deemed the Confidential Information of King, and Joint Technology shall be deemed the Confidential Information of both Parties. During the Term hereof, neither Party shall disclose any of its own Confidential Information in such a manner that would reasonably be expected to adversely impact any intellectual property rights or commercial interests of the Development Program or the Products, unless such disclosure is subject to confidentiality obligations as strict as those contained in this Agreement or the License Agreement. 19. "CONSULTANT" means a Third Party who has entered into or hereafter enters into a written agreement with PTI or King or both to provide consulting services that are material or are reasonably likely, in the judgment of the JOC, to become material to the Development Program, which written agreement shall (a) include an assignment of all right, title, and interest in and to all work product and all inventions arising from the performance of such agreement, and all intellectual property rights attaching thereto, to PTI or King, as applicable, and (b) bind the relevant Third Party by obligations of confidentiality and non-use with respect to all such work product, inventions, Confidential Information, and intellectual property rights that are at least as stringent as those set forth herein. PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. Annex A-3 20. "CONSULTATION" means providing a Party with an opportunity to review and comment on the development of strategies and the implementation of Program Plans, permitting a Party to participate in, where practical, either by telephone or in person, and to examine formal minutes of, all meetings and telephone calls with respect to a matter under consideration, keeping a Party informed regarding the progress of all matters, and giving due consideration to the input and comments of a Party with respect to the matters under consideration. 21. "CONTROL" or "CONTROLLED" means, (a) with respect to Technology (other than Proprietary Materials) or Patent Rights, the possession by a Party of the ability to grant a license or sublicense of such Technology or Patent Rights as provided herein without the payment of additional consideration (other than any additional consideration to be paid pursuant to the DLA) and without violating the terms of any agreement or arrangement between such Party and any Third Party and, (b) with respect to Proprietary Materials, the possession by a Party of the ability to supply such Proprietary Materials to the other Party as provided herein without the payment of additional consideration and without violating the terms of any agreement or arrangement between such Party and any Third Party. 22. "[***]" means any dosage form that is covered by any patent or patent application set forth on Schedule 22 hereto (the "Existing Patents"), as well as any continuations, divisionals, continuations-in-part (to the extent any claims thereof are entitled to claim priority to the filing date of any of the Existing Patents), patents of addition, and substitutions of the Existing Patents, together with all registrations, reissues, reexaminations or extensions of any kind with respect to any of the foregoing patents, in each case to the extent same are owned or controlled by PTI. In the event PTI reasonably believes that any claims of a continuation-in-part application of any of the Existing Patents, which claims are not entitled to claim priority to the filings date of any of the Existing Patents, cover only an incremental improvement to the subject matter described and claimed in the Existing Patents, PTI shall have the right to request that King permit such additional claims to be included within the definition of [***], and King shall consider such request in good faith. Notwithstanding the foregoing, with respect to United States Application Serial Nos. [***], and any applications or patents that claim priority to either of same, to the extent that any claims cover a dosage form of an opioid agonist alone or a method or process of using or making such a dosage form, such claims shall not be within the definition of [***], but shall be considered PTI Technology and PTI Patent Rights (and such applications and issued patents will be included on the schedule of PTI Patent Rights solely to such extent). 23. "[***]" means any dosage form of a [***] that (a) contains [***] as the only opioid agonist API and (b) is covered by the rights granted to PTI under the DLA. 24. "CTM" or "CLINICAL TRIAL MATERIALS" means any Product manufactured, packaged, and labeled as required by Applicable Law to be used as an investigational drug or placebo for use in the conduct of clinical trials in humans. 25. "DEBTOR PARTY" has the meaning set forth in Section 9.4.1(a) of this Agreement. PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. Annex A-4 26. "DEFAULT" means (a) a material breach, default, or violation, (b) for purposes of Section 5.3 of this Agreement only, the occurrence of an event that with or without the passage of time or the giving of notice, or both, would constitute a material breach, default, or violation or cause any material mortgages, liens, security interests, charges, covenants, options, claims, restrictions, and encumbrances of any kind to arise, or (c) for purposes of Section 3.8 of this Agreement only, the occurrence of an event that with or without the passage of time or the giving of notice, or both, would give rise to a right of termination, renegotiation, or acceleration or a material right to receive damages or a payment of material monies or penalties of or under such contract by a party other than a Party. 27. "DEFAULTING PARTY" has the meaning set forth in Section 3.8 of this Agreement. 28. "DESIGNATED PRODUCT" means a Product being developed by PTI as of the Effective Date (i.e., the first three (3) products specified in Section 3.1.1 of this Agreement, namely one (1) Product having oxycodone as the opioid API (Remoxy), one (1) Product having [***] as the opioid API, and one (1) Product having [***] as the opioid API); and "DESIGNATED PRODUCTS" means, collectively, all of the foregoing Products. 29. "DEVELOPMENT" or "DEVELOP" means, with respect to a Product, all research, pre-clinical, pharmaceutical, clinical, and regulatory activities and all other activities undertaken in order to obtain Regulatory Approval of such Product in accordance with this Agreement prior to Regulatory Approval of such Product. These activities shall include, among other things: test method development, CMC methods and reports (including formulation, process development, development-stage manufacturing, manufacturing scale-up, technical transfer, quality assurance, and quality control), pre-clinical pharmacology and toxicology studies and associated reports, planning and conduct of clinical studies, protocols, clinical study reports, statistical analysis plans, and clinical quality assurance prior to obtaining Regulatory Approvals, obtaining Regulatory Approvals, and regulatory affairs related to the foregoing. 30. "DEVELOPMENT PLANS" means the written plans (which shall include detailed strategy, budget, and proposed timelines) describing the pre-clinical and clinical Development activities and the regulatory activities, including a general overview of the expected schedule of meetings, discussions, and correspondence with Regulatory Authorities to be carried out for each Product during each Calendar Year pursuant to this Agreement, which plans shall include the expected Regulatory Filings to be completed and maintained by the Collaboration for each Product. The Development Plans will be amended from time to time to include statistical analysis plans, protocols, case report forms, clinical study reports, audit reports, and similar matters, as such matters are developed during the Collaboration. Without limiting the foregoing, such plans shall include, at a minimum, the activities required to remain in compliance with the terms and obligations applicable to PTI under the DLA. Each Development Plan will be set forth in a written document prepared by the Parties pursuant to Section 3.4 of this Agreement, and a separate Development Plan will be generated and approved with respect to each Product. 31. "DEVELOPMENT PROGRAM" means, collectively, (a) the collaborative development program in the Field conducted by PTI and King and (b) the marketing program in the Field conducted by King, in each case, commencing on the date hereof and conducted pursuant to this Agreement and the Program Plans. PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. Annex A-5 32. "DISCRETIONARY FUNDING" has the meaning set forth in Section 3.7.3 of this Agreement. 33. "DURECT LICENSE AGREEMENT" or "DLA" means the Development and License Agreement, dated as of December 19, 2002, by and among PTI, DURECT Corporation ("DURECT"), and Southern BioSystems, Inc., a copy of which has been provided to King, as it may be amended from time to time hereafter in accordance with Section 2.4 of the License Agreement. 34. "EFFECTIVE DATE" has the meaning set forth in the first paragraph of this Agreement. 35. "EXISTING MANAGEMENT TEAM" means not less than [***] percent ([***]%) of the individuals who, as of the date that is one year prior to the commencement of any case by or against PTI under the Bankruptcy Code, are designated as "Officers" of PTI under Rule 16a-1(f) promulgated pursuant to the Securities Exchange Act of 1934, as amended. 36. "FDA" means the United States Food and Drug Administration or any successor agency. 37. "FIELD" means pharmaceutical formulations for use in humans that contain no more than one opioid API formulated using the SABER Technology, in accordance with the DLA. 38. "FIRST COMMERCIAL SALE" means, with respect to any product, the first arm's-length sale by King, its Affiliates, or Sublicensees to a Third Party for end-use or consumption, including any sale to a wholesaler or distributor, of such product in a country after the applicable Regulatory Authority has granted Regulatory Approval. For purposes of this definition, any sale to an Affiliate or Sublicensee will not constitute a First Commercial Sale. 39. "FORCE MAJEURE EVENT" means an event beyond the reasonable control of a Party that prevents the performance, in whole or in part, by the Party of any of its obligations hereunder, including by reason of any act of God, flood or other inclement weather patterns, fire, explosion, earthquake, or war, terrorist act, revolution, civil commotion, acts of public enemies, blockage or embargo, or the like, or any injunction, law, order, ordinance, or requirement of any government or of any subdivision, authority, or representative of any such government, if, and only if, the Party affected shall have used commercially reasonable efforts to avoid the effects of such occurrence and to remedy it promptly if it has occurred. 40. "FTE RATE" means a rate of [***] U.S. dollars ($[***]) per [***] hours of work performed by personnel during Calendar Years 2005 and 2006, said rate to be increased as of January 1, 2007, and annually thereafter to reflect actual increases in the applicable Party's expenses. 41. "GAAP" means United States generally accepted accounting principles of the Party performing the applicable work, consistently applied. PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. Annex A-6 42. "GOOD CLINICAL PRACTICES" means the international ethical and scientific quality standards for designing, conducting, recording, and reporting trials that involve the participation of human subjects. In the U.S. Territory, Good Clinical Practices are established through FDA guidances (including ICH E6). 43. "GOOD LABORATORY PRACTICES" means the minimum standards for conducting non-clinical laboratory studies that support or are intended to support applications for research or marketing permits for products regulated by the FDA or equivalent foreign Regulatory Authority, including food and color additives, animal food additives, human and animal drugs, medical devices for human use, biological products, and electronic products. In the U.S. Territory, Good Laboratory Practices are established through FDA regulations (including 21 CFR Part 58), FDA guidances, FDA current review and inspection standards, and current industry standards. 44. "GOOD MANUFACTURING PRACTICES" means the minimum standards for methods to be used in, and the facilities or controls to be used for, the manufacture, processing, packing, or holding of a drug to assure that such drug meets the requirements of the Federal Food, Drug and Cosmetic Act of 1938, or its foreign equivalent, as amended, as to safety, and has the identity and strength and meets the quality and purity characteristics that it purports or is represented to possess. In the U.S. Territory, Good Manufacturing Practices are established through FDA regulations (including 21 CFR Parts 210-211), FDA guidances, FDA current review and inspection standards, and current industry standards. 45. "HOURLY FTE RATE" means the hourly rate obtained by dividing the FTE Rate by [***] hours. 46. "HSR ACT" means the Hart-Scott-Rodino Act of 1976, as amended. 47. "IND" means (a) an Investigational New Drug Application (as defined in 21 CFR Section 312.3) that is required to bE filed with the FDA before beginning clinical testing of a Product in human subjects, or any successor application or procedure, or (b) any counterpart of a U.S. Investigational New Drug Application that is required in any other country or region in the Territory before beginning clinical testing of a Product in human subjects in such country or region. 48. "INDEMNIFIED PARTY" has the meaning set forth in Section 11.3 of this Agreement. 49. "INDEMNIFYING PARTY" has the meaning set forth in Section 11.3 of this Agreement. 50. "INVENT" or "INVENTED" means (a) with respect to patentable Technology, to invent or discover, as such terms are used in 35 U.S.C. Section 101 and (b) with respect to non-patentable Technology, to discover, make or otherwise develop. 51. "IRB" means an Institutional Review Board or any constituted group that has been formally designated by a clinical site to review and monitor biomedical research involving human subjects. PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. Annex A-7 52. "JOINT OVERSIGHT COMMITTEE" or "JOC" means the committee of PTI and King representatives established pursuant to Section 2.1 of this Agreement to administer the affairs of the Development Program. 53. "JOINT PATENT RIGHTS" means Patent Rights claiming Joint Technology, as set forth on Schedule 53 hereto, which may be amended from time to time as necessary to accurately reflect the foregoing. 54. "JOINT TECHNOLOGY" means any Technology jointly Invented by employees of King and PTI, or Consultants to King and PTI, during and in the conduct of the Development Program. 55. "KING" has the meaning set forth in the first paragraph of this Agreement. 56. "KING BACKGROUND TECHNOLOGY" means any Technology that is useful in the Field or that is actually used in the Development, making or Marketing of Products and that is Controlled by King on the Closing Date. 57. "KING INDEMNITEES" has the meaning set forth in Section 11.1 of this Agreement. 58. "KING PATENT RIGHTS" means all Patent Rights that are Controlled by King and that claim King Technology, as set forth on Schedule 58 hereto, which may be amended from time to time as necessary to accurately reflect the foregoing. 59. "KING PROGRAM TECHNOLOGY" means any Technology that is (a) Invented by employees of, or Consultants to, King, alone or jointly with Third Parties (other than Consultants of PTI), in the conduct of the Development Program or (b) useful in the Field or that is actually used in the Development, manufacturing or Marketing of Products and that are acquired by King after the Closing Date pursuant to a Third Party Agreement. 60. "KING TECHNOLOGY" means, collectively, King Background Technology and King Program Technology. 61. "KNOWLEDGE" means the actual knowledge of a Party having taken reasonable steps to be informed of applicable actions and activities in the normal course of business. 62. "LICENSE AGREEMENT" means that certain License Agreement to be executed by the Parties in the form attached hereto as Exhibit A. 63. "LOSSES" has the meaning set forth in Section 11.1 of this Agreement. 64. "MAJOR MARKET COUNTRY" means one of Canada, Germany, the United Kingdom, France, Spain, Italy, or Japan; and "MAJOR MARKET COUNTRIES" means, collectively, all of the foregoing countries. 65. "MANUFACTURING/CMC PLANS" means the written CMC and manufacturing plans (which shall include a detailed strategy, budget, and proposed timelines) describing the API, synthesis, choice of manufacturers and Third Party suppliers, expected manufacturing scale-up, PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. Annex A-8 manufacture, formulation, process development, development-stage manufacture, clinical supplies manufacturing, quality assurance/quality control development, stability, filling, packaging and labeling, and shipping requirements for each Product (in accordance with customary standards for a product of comparable market potential), including all CMC, and the activities to be carried out by each Party during the applicable Calendar Year. Each Manufacturing/CMC Plan will be set forth in a written document prepared by the Parties pursuant to Section 3.5 of this Agreement, and a separate Manufacturing/CMC Plan will be generated and approved with respect to each Product. 66. "MARKET" or "MARKETING" means any and all activities directed to the marketing, detailing, and promotion of a Product for commercial sale and shall include pre-launch and post-launch marketing, mandated and non-mandated risk-management policies and procedures, market surveillance activities, promoting, detailing, distributing (including the cost and distribution of Product samples), offering to sell, and selling a Product, importing a Product for sale, and any and all Product Development conducted after obtaining marketing approval for any Product that is not performed as a condition to the first Regulatory Approval for a Product. If a Phase IV trial is performed as a condition to fulfill an obligation for Regulatory Approval for a Product, such trial shall be considered a Development activity (but not Product Development). 67. "NDA" means a New Drug Application (or an abbreviated New Drug Application) to market the Product in the Territory or similar application submitted to the FDA, or its foreign equivalent submitted to any Regulatory Authority in the Territory, and all supplements and amendments thereto. 68. "NET SALES" means the gross amount invoiced by King its Affiliates or Sublicensees, to Third Parties for sale of Products, less, to the extent deducted from such amount or on such invoice consistent with GAAP, the following items: (a) quantity, trade or cash discounts, chargebacks, returns, allowances, rebates (including any and all federal, state or local government rebates, such as Medicaid rebates) and price adjustments, to the extent actually allowed; (b) sales and other excise taxes and duties or similar governmental charges levied on such sale, to the extent such items are included in the gross invoice price; (c) amounts actually refunded due to rejected, spoiled, damaged, outdated or returned Product; and (d) freight, shipment and insurance costs actually incurred in transporting Product to a Third Party purchaser. If any Products are sold to Third Parties in transactions that are not at arm's length between the buyer and seller, or for consideration other than cash, then the gross amount to be included in the calculation of Net Sales for such sales shall be the amount that would have been invoiced had the transaction been conducted at arm's length, which amount shall be determined, whenever possible, by reference to the average selling price of the relevant Product in arm's-length transactions in the country of sale at the time of sale. Net Sales shall not include amounts invoiced for the supply, disposal of Product for, or use of Product, in clinical or pre-clinical trials or as free samples (such samples to be in quantities common in the industry for this sort of Product). 69. "NON-DEBTOR PARTY" has the meaning set forth in Section 9.4.1(a) of this Agreement. PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. Annex A-9 70. "NON-DEFAULTING PARTY" has the meaning set forth in Section 3.8 of this Agreement. 71. "PARTY" or "PARTIES" has the meaning set forth in the first paragraph of this Agreement. 72. "PATENT RIGHTS" means the rights and interests in and to issued patents and pending patent applications (which for purposes of this Agreement shall be deemed to include certificates of invention and applications for certificates of invention and priority rights) in any country, including all provisional applications, substitutions, continuations, continuations-in-part, divisions, and renewals, all letters patent granted thereon, and all reissues, reexaminations and extensions thereof. 73. "PHASE II" means a human clinical trial or trial program in any country that is intended to evaluate the safety and efficacy of a Product's dose and dose regimen in a specific indication the Product is intended to treat. 74. "PHASE II MEETING" means, with respect to a Product, the meeting with the FDA held at the end of Phase II, it being agreed that King shall have the right to participate in the preparations and planning conducted in anticipation of or in connection with such meeting. 75. "PHASE III" means a human clinical trial in any country that would otherwise meet the definition of 21 CFR 312.21(c), or its foreign equivalent. 76. "PRODUCT" means (a) any dosage form of Remoxy, and (b) any other product in the Field (i) that incorporates the SABER Technology and is covered by the rights licensed to PTI under the DLA, and (ii) that is Developed or Marketed pursuant to this Agreement. For purposes of clarity, "Product" includes those products within the Field that the Parties have agreed to Develop and Market as of the Effective Date, as well as any and all other products in the Field that King actually designates to be Developed or Marketed under this Agreement during the Term thereof. 77. "PRODUCT DEVELOPMENT" means (a) with respect to the U.S. Territory, the conduct by King and its Affiliates of additional clinical studies of a Product that has previously received Regulatory Approval from the FDA, which additional clinical studies are conducted using CTM that is in the same formulation and dosage form as the Product for which Regulatory Approval was previously obtained, and (b) with respect to the ROW, the conduct by King, its Affiliates, or its Sublicensees of clinical studies of a Product, which additional clinical studies are conducted using CTM that is in the same formulation and dosage form as the Product for which Regulatory Approval was previously obtained in the U.S. Territory (or if Regulatory Approval has not yet been obtained in the U.S. Territory, then using CTM in the same formulation(s) and dosage form(s) then being utilized by PTI under the Development Plan for such Product in the U.S. Territory). For purposes of clarity, Product Development shall include the right (i) to use the clinical data generated in such clinical studies to seek additional Regulatory Approvals for a Product and engage in associated regulatory activities and (ii) to develop new indications for a Product with the same formulation and dosage form and to develop additional support for the Product generally. PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. Annex A-10 78. "PRODUCT TRADEMARK(S)" means any trademarks and trade names, whether or not registered, and any trademark applications, renewals, extensions or modifications thereto in the Territory together with all goodwill associated therewith, trade dress and packaging which are applied to or used with Products, and any promotional materials relating thereto. 79. "PROGRAM FEE" has the meaning set forth in Section 6.2 of this Agreement. 80. "PROGRAM PLANS" means the Development Plans, the Manufacturing/CMC Plans, and the Yearly Brand Plans. 81. "PROPRIETARY MATERIALS" means any tangible chemical, biological or physical research materials. 82. "PTI" has the meaning set forth in the first paragraph of this Agreement. 83. "PTI BACKGROUND TECHNOLOGY" means any Technology that is useful in the Field or that is actually used in the Development, manufacturing or Marketing of Products and that is Controlled by PTI on the Closing Date, expressly including all rights licensed to PTI pursuant to the DLA. 84. "PTI INDEMNITEES" has the meaning set forth in Section 11.2 of this Agreement. 85. "PTI PATENT RIGHTS" means all Patent Rights that are Controlled by PTI and that claim PTI Technology, expressly including all rights licensed to PTI pursuant to the DLA, all as set forth on Schedule 85 hereto, which may be amended from time to time as necessary to accurately reflect the foregoing. 86. "PTI PROGRAM TECHNOLOGY" means any Technology that is (a) Invented by employees of, or Consultants to, PTI, alone or jointly with Third Parties (other than Consultants of King), in the conduct of the Development Program or (b) useful in the Field or that is actually used in the Development, manufacturing or Marketing of Products and that are acquired by PTI after the Closing Date pursuant to a Third Party Agreement. 87. "PTI TECHNOLOGY" means, collectively, PTI Background Technology and PTI Program Technology. 88. "REGULATORY APPROVAL" means approval by the FDA or other Regulatory Authority to market a product in a regulatory jurisdiction. 89. "REGULATORY AUTHORITY" means the FDA, the Drug Enforcement Administration, or any counterpart of such agencies outside the United States, or other national, supra-national, regional, state, or local regulatory agency, department, bureau, commission, council, or other governmental entity with authority over the distribution, importation, exportation, manufacture, production, use, storage, transport, or clinical testing, pricing, or sale of a Product, including any device incorporating the Product. 90. "REGULATORY FILINGS" means, collectively, any and all INDs and drug master files, NDAs, applications for any device incorporating the Product, applications for designation of a PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. Annex A-11 Product as an "Orphan Product(s)" under the Orphan Drug Act or any other similar filings (including any foreign equivalents and further including any related correspondence and discussions), and all data contained therein, as may be required by or submitted to any Regulatory Authority for the Regulatory Approval. 91. "REMOXY" means a drug product in the Field that contains oxycodone as its opioid API and that is formulated using the SABER Technology. 92. "ROW" means all countries and jurisdictions in the Territory, other than the U.S. Territory. 93. "SABER INFRINGEMENT" has the meaning set forth in Section 10.2(c) of this Agreement. 94. "SABER TECHNOLOGY" means the pharmaceutical formulation technology and methods of use that are covered by the rights granted to PTI pursuant to the DLA. 95. "SCIENTIFIC FAILURE" has the meaning set forth in Section 9.2.2(b) of this Agreement. 96. "SUBLICENSEE" means any Third Party to which a Party or both Parties grant a sublicense of some or all of the rights granted to such Party under this Agreement or the License Agreement, as permitted by this Agreement or the License Agreement. 97. "TAXES" means, collectively, taxes, deductions, duties, levies, fees, or charges (including any interest or penalties imposed thereon or related thereto. 98. "TECHNOLOGY" means and includes all inventions, discoveries, improvements, trade secrets and proprietary methods and materials, including Proprietary Materials, whether or not patentable, relating to the Field, including (a) samples of, methods of production or use of, and structural and functional information pertaining to, chemical compounds, proteins or other biological substances and (b) data, formulations, techniques and know-how (including any negative results). 99. "TECH TRANSFER" means cooperation between the Parties in effecting an orderly transition of the matters in question with respect to a Product, including transferring all information and files, and disclosing all necessary Technology, to the transferee. To the extent Applicable Law requires the transferee to control original documents, such original documents will be provided to the transferee as part of the Tech Transfer. Unless otherwise provided, all costs associated with Tech Transfers will be deemed Collaboration Costs. 100. "TERM" means the term of this Agreement as set forth in Section 9.1 of this Agreement. 101. "TERMINATION PROCEDURES" has the meaning set forth in Section 9.2.3 of this Agreement. PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. Annex A-12 102. "TERRITORY" means worldwide, including the U.S. Territory, but excluding Australia and New Zealand. 103. "TERMINATED PRODUCT" has the meaning set forth in Section 3.1.4 of this Agreement. 104. "THIRD PARTY" means any person or entity other than King and PTI and their respective Affiliates. 105. "THIRD PARTY AGREEMENTS" has the meaning set forth in Section 3.8 of this Agreement. 106. "U.S. TERRITORY" means the United States, including Puerto Rico, and any other U.S. protectorates, territories, and possessions. 107. "VALID CLAIM" means a claim of a pending patent application or an issued unexpired patent which, in each case, shall not have been withdrawn, canceled or disclaimed, or held unpatentable, invalid or unenforceable by a court or other tribunal of competent jurisdiction in an unappealed or unappealable decision. 108. "YEARLY BRAND PLANS" means the written Marketing plans (which shall include a detailed strategy and proposed timelines to be undertaken) describing the activities to be carried out by King during each applicable Calendar Year pursuant to this Agreement. Each Yearly Brand Plan will be set forth in a written document prepared by King and reviewed by the JOC pursuant to Section 3.6 of this Agreement, and a separate Yearly Brand Plan will be generated and approved with respect to each Product. PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. Annex A-13 EXHIBIT A LICENSE AGREEMENT PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. SCHEDULE 10.2 (D) [***] PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. SCHEDULE 22 [***] PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. SCHEDULE 53 [***] PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. SCHEDULE 58 [***] PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. SCHEDULE 85 [***] PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. EX-10.36 5 g99351exv10w36.txt EX-10.36 LICENSE AGREEMENT - PAIN THERAPEUTICS, INC. Exhibit 10.36 LICENSE AGREEMENT This License Agreement (the "Agreement") is made effective this 29th day of December, 2005 by and between PAIN THERAPEUTICS, INC., a Delaware corporation with a principal place of business at 416 Browning Way, South San Francisco, CA 94080 ("PTI") and KING PHARMACEUTICALS, INC., a Tennessee corporation with a principal place of business at 501 Fifth Street, Bristol, TN 37620 ("King"). Each of King and PTI is sometimes referred to individually herein as a "Party" and collectively as the "Parties." RECITALS WHEREAS, PTI owns or controls certain intellectual property rights relating to the preparation of tamper-resistant opioid formulations ("PTI Background Technology," as further defined herein); WHEREAS, PTI and King have entered into that certain Collaboration Agreement, dated November 9, 2005 ("Collaboration Agreement"), pursuant to which PTI and King have agreed to use the PTI Background Technology to develop one or more pharmaceutical formulations of tamper-resistant opioids for use in humans ("Products," as further defined herein); WHEREAS, King desires to obtain, and PTI is willing to grant, a license under the PTI Background Technology to develop, manufacture and market Products upon the terms and conditions set forth herein and in the Collaboration Agreement; WHEREAS, the Parties anticipate that, in the conduct of the Collaboration Agreement, certain intellectual property may be developed with applicability to products in the Field (as defined herein), including Products, which intellectual property may constitute King Program Technology, PTI Program Technology or Joint Technology (each as defined herein); and WHEREAS, the Parties desire to include any such developed intellectual property in the rights licensed under this Agreement, such that PTI's right, title and interest in any PTI Program Technology or Joint Technology will be included within the license granted to King hereunder, and King's right, title and interest in any King Program Technology or Joint Technology will be included in the license granted to PTI hereunder. NOW, THEREFORE, in consideration of the mutual promises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows: 1. DEFINITIONS Capitalized words and phrases used in this Agreement have the meanings ascribed to such terms in Annex A attached hereto. PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 2. LICENSES AND DLA 2.1 LICENSES TO KING. Subject to the terms and conditions of this Agreement and further subject to the pre-existing non-exclusive license granted by PTI to Durect under the DLA, beginning on the Closing Date and thereafter during the Term, PTI hereby grants to King the following licenses under PTI Technology and PTI Patent Rights and under PTI's ownership interest in Joint Technology and Joint Patent Rights, which licenses shall be exercisable only as set forth in this Agreement or in the Collaboration Agreement and for the conduct of the activities required or permitted in the performance of King's obligations and exercise of its rights thereunder: 2.1.1 DEVELOPMENT. An exclusive license (a) in the U.S. Territory, beginning immediately upon approval by the FDA of the NDA for each Product, to conduct Product Development with respect to such Product, (b) in the ROW, beginning immediately following the initiation of Phase II clinical trials for each Product by PTI in the U.S. Territory, to conduct Product Development with respect to such Product, (c) in the Territory, to conduct Development on Remoxy, exercisable only pursuant to Section 3.4.6 of the Collaboration Agreement, and (d) in the Territory, to conduct Development on Products, exercisable only in the event that: (i) PTI suspends, closes or otherwise ceases to operate a majority of its business relating to this Agreement and the Collaboration Agreement, or (ii) in any case commenced by or against PTI under the Bankruptcy Code (other than a case against PTI commenced with the participation, support, or encouragement of King), upon entry of an appropriate order or findings by the court presiding over such case, (A) PTI is in material breach of this Agreement or the Collaboration Agreement and such breach is not cured within sixty (60) days of the occurrence of the breach or (B) PTI rejects this Agreement or the Collaboration Agreement. For purposes of clarity, except in connection with the exercise of the licenses in clauses (c) and (d), King shall not have the right to make changes in the formulation or dosage form of Product without PTI's prior written consent, which consent shall be at PTI's sole discretion. 2.1.2 COMMERCIALIZATION. An exclusive license in the Territory to Market, use, offer for sale, sell and import Products. 2.1.3 RIGHTS OF THE PARTIES TO MAKE PRODUCTS. An exclusive license in the Territory, subject to the rights retained by PTI pursuant to Sections 2.2.1 and 2.2.5 hereof, to make Products. For the avoidance of doubt, notwithstanding anything to the contrary in Sections 2.2.1 and 2.2.5 hereof and subject only to Durect's right, pursuant to Section 5.5 of the DLA, to make and supply GMP-qualified Excipient Ingredients (as defined in the DLA) in the making of Products, King shall have the exclusive right, in the Territory, to make Products for sale in the Territory and the exclusive right to sublicense Third Parties to do so. 2.1.4 KING'S RIGHT TO SUBLICENSE. King's right to sublicense its rights to conduct Product Development, Market, use, offer for sale, sell, and import Products, and, with respect to Remoxy, to Develop pursuant to Section 3.4.6 of the Collaboration Agreement in the ROW shall be subject to PTI's consent, not to be unreasonably withheld; provided that such sublicense shall not diminish PTI's rights hereunder. PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. -2- 2.1.5 FURTHER RIGHTS WITH RESPECT TO AUSTRALIA AND NEW ZEALAND. The Parties acknowledge and agree that PTI has not granted to King any licenses in Australia and New Zealand. In the event PTI intends to enter into an agreement granting a Third Party any rights to Develop and Market any products in the Field in Australia or New Zealand under PTI Technology, PTI Patent Rights or PTI's ownership interest in Joint Technology and Joint Patent Rights, which rights are, in the judgment of the JOC, material or reasonably likely to become material, to the Collaboration or to any Products, King shall have the right to review such proposed agreement prior to its execution and provide its comments to PTI, which comments PTI will consider in good faith. PTI will use commercially reasonable efforts to ensure that such agreements contain (a) terms and conditions prohibiting the export of Products from Australia or New Zealand, except as to import/export trade between these two countries, commensurate in scope with the obligations set forth in Section 2.6 hereof and (b) provisions granting to PTI the right to use, in the Territory, all Technology and Patent Rights developed by PTI or such Third Party, in whole or in part, through the use of the PTI Patent Rights, PTI Technology, Joint Patent Rights or Joint Technology, and the right to license or sublicense such rights to King, which PTI rights shall be included within the licenses granted to King hereunder so long as King agrees to assume those royalty, milestone and similar payment obligations (if any) due to such Third Party in connection with King's, its Affiliate's or Sublicensee's, use of such rights in the Territory. 2.2 LICENSES TO PTI. Subject to the terms and conditions of this Agreement, King hereby grants to PTI the following licenses, exercisable only as set forth in this Agreement or in the Collaboration Agreement and only for the conduct of the activities required or permitted in the performance of PTI's obligations and exercise of its rights thereunder: 2.2.1 IN THE TERRITORY. Beginning on the Closing Date and thereafter during the Term, in the Territory, (a) a co-exclusive (with King only) license, with the right to grant sublicenses only as expressly set forth in the Collaboration Agreement, under King Technology and King Patent Rights to Develop Products, (b) a non-exclusive license to make products in the Field, including Products, in each case solely and exclusively for export to Australia and New Zealand, subject to the limitations set forth in Section 5.2 of the Collaboration Agreement, with the right to grant sublicenses subject to any applicable requirements set forth in this Agreement, under King Technology and King Patent Rights, solely to the extent any of the foregoing are Invented based on the use of PTI Technology or PTI Patent Rights or developed or acquired by King primarily for use in the Development, manufacture or Marketing of Products in the Collaboration, and (c) a right to negotiate in good faith with King to obtain a non-exclusive, royalty-bearing license, with other appropriate terms, to make products in the Field, including Products, in each case solely and exclusively for export to Australia and New Zealand, subject to the limitations set forth in Section 5.2 of the Collaboration Agreement, with the right to grant sublicenses subject to any applicable requirements set forth in this Agreement, under any other King Technology and King Patent Rights not set forth in subsection (b) hereof that are reasonably necessary to make products in the Field, including Products. PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. -3- 2.2.2 OUTSIDE THE TERRITORY. Beginning on the Closing Date and thereafter during the Term, outside the Territory (a) a non-exclusive, royalty-free license to Develop, make, use, sell, offer for sale, import and Market products in the Field, including Products, with the right to grant sublicenses subject to the terms set forth in Section 2.1.5 of this Agreement, under King Technology and King Patent Rights, solely to the extent any of the foregoing are Invented by King based on the use of PTI Technology or PTI Patent Rights or developed or acquired by King primarily for use in the Development, making, or Marketing of Products in the Collaboration, and (b) a right to obtain, on commercially reasonable terms, a non-exclusive, royalty-bearing license, with other appropriate terms, to Develop, make, use, sell, offer for sale, import and Market products in the Field, including Products, with the right to grant sublicenses subject to the terms set forth in Section 2.1.5 of this Agreement, under any other King Technology and King Patent Rights that are reasonably necessary to Develop, make, use, sell, offer for sale, import and Market products in the Field, including Products. 2.2.3 POST-TERMINATION. In the event of the expiration of the Collaboration Agreement or a termination of the Collaboration Agreement pursuant to Section 9.2.2 thereof (by King at will) or by PTI pursuant to Section 9.2.3 thereof as a result of King's breach, beginning on the effective date of such termination or expiration, (a) a non-exclusive, world-wide, royalty-free license to Develop, make, use, offer for sale, sell, import and Market products in the Field, including Products, (or, in the case of termination under Section 9.2.2(a) of the Collaboration Agreement with respect to a particular Product, only to Develop, make, use, offer for sale, sell, import and Market the Terminated Product, as defined therein), including the right to grant sublicenses without restriction, under King Technology and King Patent Rights, solely to the extent any of the foregoing are Invented by King based on the use of PTI Technology or PTI Patent Rights, or are developed or acquired by King primarily for use in the Development, making or Marketing of Products in the Collaboration, and (b) a right to obtain, on commercially reasonably terms, a non-exclusive, world-wide, royalty-bearing license to Develop, make, use, offer for sale, sell, import and Market products in the Field, including Products, (or, in the case of termination under Section 9.2.2(a) of the Collaboration Agreement with respect to a particular Product, only to Develop, make, use, offer for sale, sell, import and Market the Terminated Product, as defined therein), with other appropriate terms, including the right to grant sublicenses without restriction, under any other King Technology and King Patent Rights that are reasonably necessary to Develop, make, use, offer for sale, sell, import and Market products in the Field, including Products, (or, in the case of termination under Section 9.2.2(a) of the Collaboration Agreement with respect to a particular Product, only to Develop, make, use, offer for sale, sell, import and Market the Terminated Product, as defined therein). In the event of a termination of the Collaboration Agreement by King pursuant to Section 9.2.3 thereof as a result of PTI's breach, PTI shall have the right to obtain, on commercially reasonable terms, a non-exclusive, world-wide, royalty-bearing license, with other appropriate terms, to Develop, make, use, offer for sale, sell, import and Market products in the Field, including Products, including the right to grant sublicenses without restriction, under King Technology and King Patent Rights, solely to the extent any of such King Technology and King Patent Rights are Invented by King based on the use of PTI Technology or PTI Patent Rights, or are developed or acquired by King primarily for use in the PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. -4- Development, making or Marketing of Products in the Collaboration. Except as set forth in this Section 2.2.3, Section 2.2.1 (with respect to Development of Products in the U.S. Territory and making of Products for use outside the Territory) or Section 2.2.5 (with respect to CTM), PTI shall have no right to Develop, make, use, offer for sale, sell, import or Market Products in the Territory. 2.2.4 [***]. Beginning on the Closing Date and during the Term hereof and, in the event of the expiration of the Collaboration Agreement or a termination of the Collaboration Agreement pursuant to Section 9.2.2 thereof (by King at will) or by PTI pursuant to Section 9.2.3 thereof as a result of King's breach, continuing after the effective date of such termination or expiration, (a) a non-exclusive, world-wide, royalty-free license to develop, make, use, offer for sale, sell, import and market (i) [***] that do not incorporate the SABER Technology, and (ii) [***], with the right to grant sublicenses without restriction, under King Technology and King Patent Rights that are reasonably necessary to develop, make, use, offer for sale, sell, import and market [***], solely to the extent any of such King Technology or King Patent Rights are Invented by King based on the use of PTI Technology or PTI Patent Rights or are or are developed or acquired by King primarily for use in the Development, making or Marketing of Products in the Collaboration, and (b) a right to obtain, on commercially reasonable terms, a non-exclusive, world-wide, royalty-bearing license to develop, make, use, offer for sale, sell, import and market (i) [***] that do not incorporate the SABER Technology, and (ii) [***], with other appropriate terms, with the right to grant sublicenses without restriction, under any other King Technology and King Patent Rights that are reasonably necessary to develop, make, use, offer for sale, sell, import and market [***]. For the avoidance of doubt, the licenses and rights granted by King to PTI under this Section 2.2.4 shall be exercisable by PTI only with respect to [***] that do not incorporate the SABER Technology or that are [***]. 2.2.5 TO MAKE CTM. PTI shall have, and hereby retains under the PTI Technology, PTI Patent Rights and PTI's interest in the Joint Technology and Joint Patent Rights, (a) the exclusive right to make CTM, solely for use by King or its Affiliates or Sublicensees in novel formulations and dosage strengths for the conduct of Product Development in the Territory, and (b) the exclusive right to make CTM solely for use by PTI or its Sublicensees in the U.S. Territory in the Development of Products. King hereby grants to PTI a limited, exclusive license under the King Technology, King Patent Rights and King's interest in the Joint Technology and Joint Patent Rights, to manufacture such CTM for use by PTI, King and the Affiliates and permitted licensees and Sublicensees of each in the Territory. The rights granted to and retained by PTI pursuant to this Section 2.2.5 shall be exercisable by PTI only as set forth under the Collaboration Agreement and for the conduct of the activities required in the performance of its obligations or exercise of its rights thereunder. PTI may sublicense its rights to make CTM of Products for use in the Territory hereunder; provided that King shall have the right to review, prior to execution, any such agreement that either (x) requires payments by a Party to a Third Party of greater than [***] over the life of the contract or (y) is, in the judgment of the JOC, otherwise material, or reasonably likely to become material, to the Collaboration. King shall have the right to provide its comments to PTI on such agreements, which comments PTI will consider in good faith. PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. -5- 2.3 JOINT TECHNOLOGY AND JOINT PATENT RIGHTS. Subject to the rights and licenses granted hereunder, each Party shall have the unrestricted right to use, license and otherwise exploit all Joint Technology and Joint Patent Rights, without accounting to the other Party or obtaining any approval of the other Party with respect thereto. 2.4 FULFILLMENT AND OBSERVANCE OF CERTAIN OBLIGATIONS UNDER THE DLA. Notwithstanding anything to the contrary herein, King acknowledges and agrees that PTI is subject to certain obligations under the DLA. In the event of any conflict between the terms of (a) this Agreement or the Collaboration Agreement and (b) the DLA, the terms of the DLA (to the extent valid and enforceable) shall govern PTI's rights and obligations, and the rights and obligations of King hereunder (and under the Collaboration Agreement) are, and shall be, in all respects subject to the limitations placed on the rights granted to PTI under the DLA. In furtherance of the grant of rights set forth in this Section 2, PTI acknowledges that it is responsible for the fulfillment of its obligations under the DLA, except to the extent King has agreed to assume any such obligations pursuant to Sections 5 and 6 hereof or under the Collaboration Agreement. King hereby agrees to use commercially reasonable efforts to abide by the provisions of the DLA to the extent same are applicable to sublicensees, and to use commercially reasonable efforts to fulfill King's obligations hereunder, and under the Collaboration Agreement, to Market and conduct Product Development (and, in the case of King's exercise of its rights under Section 3.4.6 of the Collaboration Agreement, Development with respect to Remoxy). Additionally King agrees to use commercially reasonable efforts to fulfill King's obligations under this Agreement and the Collaboration Agreement in a manner so as to enable PTI to remain in full compliance with PTI's obligations under the DLA, to the extent King is obligated to do so under this Agreement or under the Collaboration Agreement. King shall not knowingly cause PTI to be in breach of or under the DLA. [***]. [***]. Similarly, PTI shall not exercise or fail to exercise any of PTI's material rights or obligations under the DLA to the extent such exercise or failure to exercise would alter the rights or obligations of King under this Agreement or the Collaboration Agreement, without the prior written consent of King, not to be unreasonably withheld. At the reasonable request of King, PTI shall exercise such rights and make such requests with respect to Products as are permitted under the DLA, and PTI hereby agrees to permit one designee of King to participate in all regularly scheduled meetings and, to the extent practicable, all unscheduled material meetings and telephone discussions, of the Joint Development Team (as such term is defined in the DLA). PTI will use commercially reasonable efforts to comply with all obligations and duties under the DLA including any provisions PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. -6- necessary to maintain in effect any rights sublicensed to King hereunder and the exclusive nature of such rights, including the preservation of King's rights hereunder in the event that PTI shall breach or default on its obligations under the DLA. If PTI should at any time breach or default on the DLA [***], PTI shall immediately notify King, [***]. If the DLA should terminate or expire for any reason other than termination as a consequence of King's breach or default of its obligations under this Agreement or the Collaboration Agreement, then King's sublicensed rights thereunder shall continue in full force and effect provided that King promptly agrees in writing to be bound by the applicable terms and conditions of the DLA, and PTI shall take whatever reasonable steps and perform whatever reasonable acts are reasonably necessary or helpful to ensure that King's sublicense continues, mutatis mutandis, in full force and effect. 2.5 NO OTHER RIGHTS. King hereby receives no rights to utilize PTI Technology or PTI Patent Rights except as expressly set forth herein. PTI hereby receives no rights to utilize King Technology or King Patent Rights except as expressly set forth herein. 2.6 REIMPORTATION. PTI hereby acknowledges and agrees that it has granted to King hereunder exclusive rights to Market, distribute, offer for sale, sell, and import Products, and manufacture or have manufactured Products for sale in the Territory, in each case within the Territory, as set forth in Section 2.1 hereof. PTI acknowledges and agrees that PTI has no right to, and shall not, and shall not grant any right or license to any of its Affiliates, licensees, Sublicensees or other Third Parties, directly or indirectly, under the PTI Patent Rights, the PTI Technology, the Joint Patent Rights, the Joint Technology, the King Patent Rights or the King Technology in the Territory, to (a) sell, distribute, have distributed, offer for sale, have sold, import or have imported Products or (b) manufacture or have manufactured Products, except to the extent expressly permitted in Section 2.2.1 or 2.2.5 hereof, and shall not grant any such right to any Affiliate or Third Party outside the Territory if PTI knows or has reason to know that such Third Party intends to undertake any such activities in the Territory. PTI shall use commercially reasonable efforts to prevent, in the Territory, the making of any Products by PTI or any of its Affiliates, licensees, Sublicensees or other Third Parties (except to the extent permitted in Section 2.2 hereof) and the selling, distribution, offer for sale and importation of Products by PTI or any of its Affiliates, licensees, Sublicensees or other Third Parties. In the event PTI fails to use such commercially reasonably efforts, and any Products are sold, distributed, offered for sale, or imported by PTI or any of its Affiliates, licensees, Sublicensees or other Third Parties in the Territory, King shall be entitled to adjust its royalty obligations payable pursuant to Sections 6.1.1 and 6.1.4 hereof in an amount adequate to compensate King for lost profits incurred as a result of such unauthorized sale, distribution, offer for sale or importation. 2.7 [***]. The Parties acknowledge and agree that PTI retains the exclusive right to develop, make, use, offer for sale, sell, import and otherwise commercialize [***]. Notwithstanding the foregoing, PTI agrees that it shall not make, use, offer for sale, sell import or otherwise commercialize any [***] which PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. -7- incorporate the SABER Technology, other than [***]. [***]. If any [***] is sold by PTI, its Affiliates or Sublicensees in any country in the Territory in which a corresponding Product that contains the same opioid agonist as its API has already received Regulatory Approval, then King's royalty obligations to PTI pursuant to Sections 6.1.1 and 6.1.4 hereof with respect to Net Sales of and sublicensing revenue derived from such Product in such country shall automatically and immediately be reduced by [***] of their original amount (as specified in Sections 6.1.1 and 6.1.4 of this Agreement, respectively). If any [***] receives Regulatory Approval in any country in the Territory in which the corresponding Product containing the same opioid agonist as its API has not already received Regulatory Approval, then, at King's sole discretion, King may elect either (a) not to conduct Product Development, seek Regulatory Approval, or Market such corresponding Product in the relevant country in the Territory, pursuant to Section 3.4.12 of the Collaboration Agreement, in which case, notwithstanding anything to the contrary in this Agreement or the Collaboration Agreement, King's diligence obligations hereunder and under the Collaboration Agreement with respect to such corresponding Product in such country in the Territory shall be waived and King shall have no obligation to designate a replacement Product to be Developed or Marketed instead of such corresponding Product in such country in the Territory or (b) to Market such corresponding Product, in which case King's royalty obligations to PTI pursuant to Sections 6.1.1 and 6.1.4 hereof with respect to Net Sales of and sublicensing revenue derived from such Product in such country or region shall automatically and immediately be reduced by [***] of their original amount (as specified in Section 6.1.1 and 6.1.4 of this Agreement, respectively). King's right to reduce payments otherwise due to PTI pursuant to this Section 2.7 shall be effective immediately upon the First Commercial Sale of the relevant [***] in the relevant country or region and continue for so long as such [***] is being sold in such country or region by PTI, its Affiliates, licensees or Sublicensees. Notwithstanding anything herein or in the Collaboration Agreement to the contrary, PTI shall at all times be and remain liable and responsible for any and all royalty, milestone and other payments due to Durect under the DLA with respect to any and all [***], and PTI shall be solely responsible and liable to Durect with respect to the diligence obligations pertaining to the relevant [***]. In the event King elects not to launch a Product pursuant to Section 2.7(a) hereof, PTI shall be solely responsible and liable to Durect with respect to the diligence obligations pertaining to the relevant Product in the relevant country or region. 3. INTELLECTUAL PROPERTY RIGHTS 3.1 DISCLOSURE. Each Party shall, through its Patent Coordinator, keep the other Party reasonably informed regarding developed or acquired King Background Technology or PTI Background Technology, as applicable, as well as all Technology that is invented, made or developed in the course of carrying out the Development and Marketing Program (or the manufacture of Products) by employees or Consultants of such Party or its Affiliates, alone or jointly with employees or Consultants of the other Party or its Affiliates. The provisions of this Section 3 shall apply to rights in the Technology invented, made or developed by or on behalf of PTI or King, or both, during the course of carrying out the Development and Marketing Program (including the manufacture of Products in connection therewith). PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. -8- 3.2 OWNERSHIP. The terms and conditions of this Agreement, including this Section 3 are expressly subject to the applicable terms and conditions of (including restrictions and limitations and the pre-existing rights and obligations of Durect pursuant to) the DLA, and to the extent the DLA expressly requires the assignment of any of the PTI Technology, PTI Patent Rights, King Technology, King Patent Rights, Joint Technology or Joint Patent Rights to Durect, PTI and King hereby agree to assign same in accordance with the terms and conditions of the DLA. To the extent not inconsistent with the terms of the DLA, the ownership of Technology and Patent Rights shall be as follows: 3.2.1 PTI INTELLECTUAL PROPERTY RIGHTS. PTI shall have sole and exclusive ownership of all right, title and interest on a world-wide basis in and to any and all PTI Technology and PTI Patent Rights, with full rights to license or sublicense, subject to the obligations to King as set forth herein. 3.2.2 KING INTELLECTUAL PROPERTY RIGHTS. King shall have sole and exclusive ownership of all right, title and interest on a world-wide basis in and to any and all King Technology and King Patent Rights, with full rights to license or sublicense, subject to the obligations to PTI as set forth herein. 3.2.3 JOINT TECHNOLOGY RIGHTS. King and PTI shall jointly own all Joint Technology and Joint Patent Rights, subject to the rights of, and the licenses granted to, each Party hereunder. Subject to the rights of, and the licenses granted to, each Party hereunder, the Parties hereby agree that as joint owners of such rights, each Party may use or license or sublicense to any Affiliate or Third Party or otherwise exploit all such rights for any or all purposes without restriction outside the Field and neither Party shall have any obligation to account to the other Party for profits or to obtain any approval of the other Party with respect thereto. 3.2.4 PATENT COORDINATORS. PTI and King shall each appoint a patent coordinator (each, a "Patent Coordinator" and, collectively, the "Patent Coordinators"), reasonably acceptable to the other Party, who shall serve as such Party's primary liaison with the other Party on matters relating to patent filing, prosecution, maintenance and enforcement. Each Party may replace its Patent Coordinator at any time by notice in writing to the other Party. 3.2.5 INVENTORSHIP. The JOC, with the advice of the Patent Coordinators and, in the event of a dispute between the Parties, their legal counsel, shall determine the inventorship of any subject matter arising hereunder according to the principles set forth in this Section 3.2.5. Solely for purposes of determining ownership of any PTI Patent Rights, King Patent Rights and Joint Patent Rights and the rights and obligations of the Parties hereunder, the inventorship standards contained in United States patent law shall apply. For the avoidance of doubt, the inventorship set forth in any particular patent application or patent within the PTI Patent Right, King Patent Right or Joint Patent Right shall be made, as a legal matter, in accordance with the patent laws of the relevant jurisdiction. The JOC, with the advice of the Patent Coordinators, shall also, in the case of dispute, make the determination as to whether an invention is King Technology, PTI Technology or Joint Technology. If the JOC cannot resolve the dispute, it shall be PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. -9- resolved by independent patent counsel, not otherwise engaged by either Party, selected by the Patent Coordinators. The reasonable expenses of such independent patent counsel shall be shared equally by the Parties. 4. FILING, PROSECUTION AND ENFORCEMENT OF PATENT RIGHTS 4.1 DLA. The terms and conditions of this Section 4 are expressly subject to the pre-existing rights and obligations of Durect pursuant to the DLA. To the extent the DLA permits PTI or its Sublicensees (as such term is defined in the DLA) to prepare, file, prosecute, maintain or enforce intellectual property rights, or defend against a claim of infringement or misappropriation, PTI hereby grants such rights to King as follows. 4.2 PATENT PROSECUTION. During the Term of this Agreement, with respect to any Patent Rights arising hereunder: 4.2.1 PTI, acting through patent attorneys or agents of its choice, shall be responsible for the preparation, filing, prosecution (including the application for and conduct of any re-examination, reissue, term extension or similar procedure) and maintenance of all patents and patent applications claiming the PTI Patent Rights and the conduct of any interferences, the defense of any oppositions or other similar procedures with respect thereto, and King shall reimburse PTI for half of all documented reasonable costs actually incurred directly in connection therewith in the Territory. At PTI's request, King shall reasonably cooperate with and assist PTI in connection with such activities. PTI agrees to consider in good faith any reasonable request King may make in connection with such activities related to the PTI Patent Rights that are (a) licensed by PTI from Durect pursuant to the DLA or (b) actually then being used in the Development Program or are, in the judgment of the JOC, reasonably likely to be used or useful in the Development, manufacture or Marketing of any Products hereunder or under the Collaboration Agreement, in accordance with the terms and conditions of Article XII of the DLA. 4.2.2 King, acting through patent attorneys or agents of its choice, shall be responsible for the preparation, filing, prosecution (including the application for and conduct of any re-examination, reissue, term extension or similar procedure) and maintenance of all patents and patent applications claiming the King Patent Rights and the Joint Patent Rights and the conduct of any interferences, the defense of any oppositions or other similar procedures with respect thereto, in each case at King's sole expense. At King's request, PTI shall reasonably cooperate with and assist King in connection with such activities. 4.2.3 Except as expressly provided in Section 8, neither Party makes any warranty with respect to the validity, perfection or dominance of any patent or other proprietary right or with respect to the absence of rights in Third Parties which may be infringed by the manufacture or sale of any Product. Each Party agrees to bring to the attention of the JOC any patent or patent application it discovers which relates to the rights of either Party under this Agreement. PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. -10- 4.3 INFORMATION AND COOPERATION IN PROSECUTION. Each Party responsible for the preparation, filing, prosecution and maintenance of Patent Rights as described in Section 4.2 (the "Filing Party") shall keep the JOC regularly informed of the status of the Patent Rights for which it is responsible in accordance with Section 4.2, in each case to the extent such Patent Rights are (a) licensed by PTI from Durect pursuant to the DLA or (b) actually then being used in the Development Program or are, in the judgment of the JOC, reasonably likely to be used or useful in the Development, manufacture or Marketing of any Products hereunder or under the Collaboration Agreement. The Filing Party shall provide the Patent Coordinator of the other Party with copies of all filings and correspondence with the patent offices, administrative boards or courts which the Filing Party sends or receives in connection with the activities described in Section 4.2 with respect to such Patent Rights, within twenty (20) days of receipt and at least twenty (20) days prior to filing, respectively, including copies of each patent application, office action, response to office action, declaration, information disclosure statement, request for terminal disclaimer, request for patent term extension and request for reissue or reexamination. The Filing Party shall give good faith consideration to the other Party's comments. The Filing Party shall carefully follow the advice and direction of the JOC with respect to strategy for the Patent Rights for which it is responsible. 4.4 ABANDONMENT. Subject to the pre-existing rights and obligations of Durect pursuant to the DLA, to the extent applicable to those PTI Patent Rights licensed by PTI from Durect thereunder or to DURECT Inventions (as such term is defined in the DLA) developed by or on behalf of either Party under the Collaboration, if a Filing Party decides to abandon or to allow to lapse any of its Patent Rights described in this Agreement, the Filing Party shall inform the other Party and the JOC at least forty-five (45) days prior to the effective date of such decision, and the JOC shall decide what actions should be taken with respect to such Patent Rights. If the JOC has not reached a decision fifteen (15) days prior to such effective date, then the non-Filing Party shall have the right, at the non-Filing Party's expense, to take any actions it deems reasonably necessary and appropriate to prevent the abandonment or lapse of the relevant Patent Rights, in the Filing Party's name, in order to maintain the status quo. The Filing Party hereby authorizes the non-Filing Party to make, constitute, and appoint any representative as the non-Filing Party may select, in its sole discretion, as the true and lawful attorney-in-fact for the Filing Party, with power to endorse the Filing Party's name on all applications, documents, papers, and instruments necessary or desirable for the non-Filing Party to give effect to the provisions of this Section 4.4 and the intent of the Parties hereto. This power of attorney is coupled with an interest and is supported by the consideration set forth in this Agreement. The Filing Party hereby ratifies all that such attorney-in-fact may lawfully do or cause to be done by virtue hereof. This power of attorney is irrevocable until the earlier of the expiration of the last to expire of the PTI Patent Rights, King Patent Rights and Joint Patent Rights and the termination of this Agreement. In rendering its determination, the JOC shall decide how to respond to the activities of such non-Filing Party, what the rights of the Parties shall be with respect to the relevant Patent Rights, and how to allocate responsibility for any costs incurred in connection with same. 4.5 ACTUAL OR THREATENED INFRINGEMENT. 4.5.1 In the event either Party becomes aware of any probable infringement or unauthorized possession, knowledge or use of any Patent Right or Technology that is (a) PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. -11- licensed by PTI from Durect pursuant to the DLA or (b) actually then being used in the Development Program or, in the reasonable judgment of such Party, reasonably likely to be used or useful in the Development, manufacture or Marketing of any Products hereunder or under the Collaboration Agreement (collectively, an "Infringement"), that Party shall notify the JOC and other Party within thirty (30) days and shall provide each with full details (an "Infringement Notice"). The JOC shall decide what actions are to be taken with respect to such matters, subject to the provisions of this Section 4.5. 4.5.2 As between the Parties, King shall have the first right and option, but not the obligation, to prosecute or prevent the Infringement in the Territory of or relating to (a) King Patent Rights, King Technology, Joint Patent Rights or Joint Technology, (b) PTI Patent Rights and PTI Technology (whether or not licensed from Durect pursuant to the DLA) that are actually then being used in the Development Program or, in the judgment of the JOC, reasonably likely to be used or useful in the Development, manufacture or Marketing of any Products hereunder or under the Collaboration Agreement or (c) any continuations, divisionals, continuations-in-part (to the extent any of the asserted claims are entitled to claim priority to the filing date of any of the PTI Patent Rights identified in subsection (b) of this Section 4.5.2), patents of addition, and substitutions of the PTI Patent Rights identified in subsection (b) of this Section 4.5.2, together with all registrations, reissues, reexaminations or extensions of any kind with respect to any of the foregoing PTI Patent Rights. If King does not commence a suit, action or proceeding to prosecute, or otherwise take steps to prevent or terminate such Infringement within one hundred eighty (180) days from any Infringement Notice or, in the case of a certification filed pursuant to 21 U.S.C. 355(j)(2)(A)(vii)(IV), twenty (20) days, then PTI shall have the right and option to take such action as PTI will consider appropriate to prosecute or prevent such Infringement, but only if, with respect to King Patent Rights and King Technology, such King Patent Rights and King Technology are actually then being used in the Development Program or are, in the judgment of the JOC, reasonably likely to be used or useful in the Development, manufacture or Marketing of any Products hereunder or under the Collaboration Agreement. If the Party prosecuting an Infringement in accordance with this Section 4.5 determines that it is necessary or desirable for the other Party to join any such suit, action or proceeding, the other Party shall, upon written notice from the prosecuting Party, referencing this Section 4.5, and at the prosecuting Party's expense, execute all papers and perform such other acts as may be reasonably required in the circumstances for the prosecuting Party to exercise its rights under this Section 4.5, including for purposes of maintenance of standing or to otherwise prosecute such Infringement. 4.5.3 At King's reasonable request, PTI agrees to consider in good faith any reasonable request in connection with any suit, action or proceeding brought by Durect and relating to those PTI Patent Rights and PTI Technology Rights that are (a) licensed by PTI from Durect pursuant to the DLA or (b) actually then being used in the Development Program or, in the judgment of the JOC, reasonably likely to be used or useful in the Development, manufacture or Marketing of any Products hereunder or under the Collaboration Agreement, in accordance with the terms and conditions of Article XII of the DLA. PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. -12- 4.5.4 ALLOCATION OF COSTS AND DAMAGES AWARD. Each Party shall have the right, at its sole expense, to be represented by counsel of its own selection in any suit, action or proceeding instituted in accordance with this Section 4.5 by the other Party for Infringement. The Party initiating a suit, action or proceeding pursuant to this Section 4.5 shall bear all other costs incurred by the Parties in connection therewith, and all damages, costs or other monetary awards shall first be used to reimburse such initiating Party, then to reimburse the other Party for all reasonable attorneys' fees incurred in connection with such Party's separate representation, and the remainder, if any, shall be shared [***] to the Party initiating the suit and [***] to the other Party. 4.6 DEFENSE OF CLAIMS. 4.6.1 NOTICE AND CONDUCT OF ACTION. In the event that any suit, action or proceeding is brought against PTI or King or any Affiliate or Sublicensee of either Party alleging the infringement of the Technology, Patent Rights or other intellectual property rights of a Third Party by reason of any Party's activities performed in accordance with this Agreement or by reason of the manufacture, use or sale of any Product in accordance herewith or with the Collaboration Agreement, then, subject to the pre-existing rights of Durect pursuant to the DLA, to the extent applicable to those PTI Patent Rights or PTI Technology licensed by PTI from Durect thereunder or to DURECT Inventions (as such term is defined in the DLA) developed by or on behalf of either Party under the Collaboration, King shall assume control of the defense of any action, suit or proceeding at its expense. Each Party will give the other Party prompt written notice of the commencement of any such suit, action or proceeding or claim of infringement and will furnish the other Party a copy of each communication relating to the alleged infringement. King may join PTI as a party to the suit, action or proceeding and PTI shall execute all documents and take all other actions, including giving testimony, which may reasonably be required in connection with the conduct of such suit, action or proceeding. In the event PTI joins in any such action, suit or proceeding, PTI shall have the right to separate counsel in such action, suit or proceeding. All costs and expenses incurred in connection with any suit, proceeding or action under this Section 4.6 shall be borne solely and exclusively by King, including all attorneys fees; provided that if PTI elects to obtain separate counsel, PTI shall bear the costs of such separate representation unless in the reasonable opinion of PTI's counsel, either (a) one or more significant defenses are available to PTI that are not available to King or (b) a conflict or potential conflict exists between PTI and King that would make separate representation advisable. 4.6.2 CONSEQUENCES OF ACTION. The Parties shall examine and discuss in good faith the consequences of any actual or threatened suit, action or proceeding alleging infringement of the Technology, Patent Rights or other intellectual property rights of a Third Party with respect to activities under this Agreement or the Collaboration Agreement. In the event any such suit, action or proceeding, or threat thereof, results in an obligation on King to pay royalties, milestones, damages, costs, expenses or any other financial consideration to any Third Party, whether by court order, consent decree, settlement or license agreement or otherwise, King shall be entitled to deduct from such payments from the amounts owing to PTI hereunder, as follows: The corresponding royalty amounts otherwise owing to PTI hereunder shall be reduced by [***] PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. -13- [***] of such royalty payments to such Third Party; provided that in no event will the royalty payments payable to PTI hereunder be reduced by more than [***] of their original amount (as specified in Sections 6.1.1 and 6.1.4 of this Agreement). The milestone amounts otherwise owing to PTI hereunder shall be reduced by [***] of such milestone payments to such Third Party; provided that if and when King's outstanding milestone obligations to PTI are insufficient to permit full offset of the creditable Third Party milestone amounts, then King shall be entitled to offset [***] of the remaining Third Party milestone amounts against the royalty payments payable to PTI hereunder, until all of the creditable Third Party milestone payments have been offset; provided that at no time will the royalty payments payable by PTI hereunder be reduced by more than [***] of their original amount (as specified in Sections 6.1.1 and 6.1.4 of this Agreement). 4.7 COOPERATION IN LITIGATION. PTI and King shall each, and shall cause, to the extent it has the right to do so, each of its Affiliates to, require each past or present employee, consultant, representative, contractor, agent or other individual under the custody or control of such Party (including any such individual that is, or is identified as, an inventor of any of the PTI Patent Rights, the King Patent Rights or the Joint Patent Rights) to cooperate with the other Party, its attorneys, agents, successors and assigns, to litigate and to otherwise protect any and all of the King Patent Rights, the PTI Patent Rights and the Joint Patent Rights or to defend against any Third Party suit, in each case as such other Party may request, including to (a) execute such documents, sign all lawful papers, and make all rightful oaths as the party with primary responsibility hereunder for the relevant litigation deems reasonably necessary or appropriate in connection with same; (b) communicate any relevant facts known or reasonably available to such Party or its Affiliates; (c) provide testimony for and make available relevant documents, things, records, papers, information, samples and specimens within its possession, custody and control, as requested; and (d) generally do everything reasonably necessary to obtain and enforce proper protection for the King Patent Rights, the PTI Patent Rights and the Joint Patent Rights in accordance with this Agreement. No Party shall compromise, litigate, settle or otherwise dispose of any suit, action or proceeding under Section 4.5 or 4.6 without the advice and prior consent of the JOC. 4.8 TRADEMARK PROSECUTION. King shall own all right, title and interest in and to the Product Trademark and PTI hereby assigns same to King and shall execute such assignment documents as King reasonably requests for purposes of recording the foregoing assignment. King shall have the right, at its own expense, and using mutually acceptable outside counsel, to file, prosecute, defend and maintain before all trademark offices the Product Trademarks. 5. DILIGENCE 5.1 REASONABLE DILIGENCE BY KING. King shall use commercially reasonable efforts and diligence to Market Products and shall allocate resources and personnel thereto consistent with contemporaneous reasonable scientific and business practices and judgments in the pharmaceutical industry for products with similar commercial value, market potential and profitability, in accordance with the terms and conditions of the Collaboration Agreement. King shall use commercially reasonable efforts to Commercialize (as such term is defined in the DLA) Products, in accordance with PTI's rights and obligations pursuant to Section 8.5 of the DLA as set forth herein and in the Collaboration Agreement. PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. -14- 6. CONSIDERATION 6.1 PAYABLE BY KING. In consideration for the rights and licenses granted herein, King shall pay PTI the following: 6.1.1 ROYALTIES ON KING'S NET SALES. Beginning with the First Commercial Sale and except as provided in Section 6.1.2, King shall pay to PTI a running royalty equal to fifteen percent (15%) of Net Sales of Product by King or its Affiliates or Sublicensees in the Territory to the extent the sale of such Product, until the total aggregate Net Sales of all Products sold by King or its Affiliates or Sublicensees in the Territory equals $1 billion, inclusive. When the total aggregate Net Sales of all Products sold by King or its Affiliates or Sublicensees in the Territory exceeds $1 billion, then King shall thereafter, for the Term of this Agreement and except as provided in Section 6.1.2, pay to PTI a running royalty equal to twenty percent (20%) of Net Sales of Product by King or its Affiliates or Sublicensees in the Territory. 6.1.2 NO PATENT COVERAGE. In the event that the sale of any Product is not (i) covered by a Valid Claim of the PTI Patent Rights, or (ii) otherwise entitled to market exclusivity, in each case at the time and in the country of its sale, King and its Affiliates and Sublicensees shall be entitled to reduce the running royalties on Net Sales of such Products in such country at a rate equal to [***] of the royalty rate that would otherwise be owed with respect to such Net Sales under Section 6.1.1 above. 6.1.3 AMOUNTS PAYABLE UNDER THE DLA. In accordance with the terms and conditions of the DLA, King shall pay to PTI, and PTI shall pay to Durect (or, at PTI's request, King shall pay directly to Durect), (a) those milestones owed by PTI to Durect under Sections 9.2 and 9.3 of the DLA, to the extent not accrued prior to the Closing Date, and (b) those royalties owed by PTI under Section 9.5 of the DLA solely to the extent attributable to Net Sales (as defined in the DLA) by King its Affiliates or Sublicensees of Licensed Product (as defined in the DLA) in the Territory (as defined in this Agreement). In no event shall King be liable to PTI for any royalty amounts owed by PTI to Durect on Net Sales (as defined in the DLA) of Licensed Product (as defined in the DLA) by or on behalf of PTI or an Affiliate, licensee or Sublicensee of PTI (other than King and King's Affiliates, licensees and Sublicensees), to the extent PTI is permitted to sell or have sold Licensed Product (as defined in the DLA) hereunder or under the Collaboration Agreement, nor for any other payments payable by PTI to Durect under the DLA. King's payment obligations pursuant to this Section 6.1.3 shall continue only for so long as King's sublicensed rights under the DLA remain in effect; provided that if any of King's sublicensed rights under the DLA become non-exclusive for reasons other than a breach by King of its obligations hereunder or under the Collaboration Agreement, then King and PTI shall negotiate in good faith an appropriate reduction in King's financial obligations hereunder and under the Collaboration Agreement. PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. -15- 6.1.4 SUBLICENSING REVENUE. In the event King enters into an agreement sublicensing to a Third Party the rights and licenses granted to it pursuant to Section 2.1 hereof to Develop, Market, distribute, offer for sale, sell, import or otherwise commercialize Products in the ROW, King shall pay to PTI [***] of all up-front, milestones and other economic consideration received by King from such Third Party in exchange for the grant of such rights, which up-front, milestones and other payments shall be subject to Sections 6.2, 6.3 and 6.4 hereof. 6.2 RECORDS AND REPORTING. King shall maintain, and shall require that its Affiliates, licensees and Sublicensees maintain, in accordance with GAAP, complete and accurate books of account containing all particulars relevant to King's, its Affiliates' and Sublicensees' sales of Products in sufficient detail to allow calculation and verification of all royalties and other payments payable to PTI hereunder. Such books of account, as well as all reasonably necessary supporting data, shall be kept at the principal place of business of King for the five (5) years following the end of the Calendar Year to which each shall pertain, and shall be open for inspection by an independent certified public accountant reasonably acceptable to King, upon reasonable notice during normal business hours at PTI's expense, as the case may be, for the sole purpose of verifying quarterly payment statements or compliance with this Agreement. In the event the inspection determines that royalties due to PTI for any period have been underpaid by five percent (5%) or more in any given Calendar Year, then King shall pay for all costs of the inspection, as well as make any payments required to remedy the overstatement. King will use commercially reasonable efforts to ensure that PTI is granted the right to audit King's Sublicensees' financial records, as provided herein; provided that, to the extent that King does not obtain that right for PTI, King shall obtain for itself such right and, at the request of PTI, King shall exercise such audit right with respect to such Sublicensees and provide the results of such audit for inspection by PTI pursuant to this Section 6.2. All royalty payments set forth in this Agreement shall, if overdue, bear interest until payment at a per annum rate of two percent (2%) above the prime rate published in The Wall Street Journal, New York edition, on the due date. The payment of such interest shall not foreclose PTI from exercising any other rights it may have as a consequence of the lateness of any payment. All information and data reviewed in the inspection shall be used only for the purpose of verifying royalties and shall be treated as King's Confidential Information subject to the obligations of this Agreement. No audit shall be conducted hereunder more frequently than once during any twelve (12)-month period. The results of each audit, if any, shall be binding on both Parties. Any dispute regarding the results of any such inspection hereunder shall be subject to the dispute resolution provisions of Section 2.3 of the Collaboration Agreement; provided that if King is the Party with final decision-making authority over the subject matter in dispute, and the CEO's are unable to reach agreement even after good faith discussions in accordance with Section 2.3 of the Collaboration Agreement, then the dispute shall not be subject to the sole discretion of either Party but shall be subject to arbitrationpursuant to the provisions of Section 2.3.3 of the Collaboration Agreement. 6.3 QUARTERLY PAYMENTS AND REPORTS. In each year the amount of royalty due shall be calculated quarterly as of the end of each Calendar Quarter and shall be paid quarterly within the forty-five (45) days next following such date. Every such payment shall be supported by the accounting described herein. All royalties due hereunder are payable in United States dollars. When Products are sold for currency other than United States dollars, the earned royalties will first be determined in the foreign currency of the country in which such Products were sold and PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. -16- then converted into equivalent United States funds. The exchange rate will be that rate quoted in The Wall Street Journal, New York edition on the last business day of the Calendar Quarter in which such sales were made. 6.4 ACCOUNTING REPORTS. With each quarterly payment, King shall deliver to PTI a full and accurate accounting to include at least the following information: 6.4.1 Quantity of Product manufactured and sold, by country, by King, its Affiliates and Sublicensees, (including the quantity of Product subject to a royalty; 6.4.2 Total sales for each Product by King, its Affiliates and Sublicensees, by country and, to the extent used in any royalty calculations during such quarter, the exchange rate set forth herein; 6.4.3 Deductions applicable as provided herein or as otherwise agreed by the Parties and all Net Sales calculations; 6.4.4 Total up-front payments, milestone payments and other payments and compensation received by King from its Sublicensees in connection with the grant of a sublicense of the rights and licenses granted to it pursuant to Section 2.1; and 6.4.5 Total royalties and other payments and compensation payable to PTI. If no royalties or other payment or compensation is due to PTI in such Calendar Quarter, King shall so report. 6.5 WITHHOLDING TAXES. All payments made by a Party hereunder shall be made to the other Party free and clear of any Taxes. If a Party is required by law to deduct or withhold any Taxes from any payment made hereunder, then such Party shall (a) make such deductions and withholdings; (b) pay the full amount deducted or withheld to the relevant taxing authority or other applicable governmental authority; and (c) promptly provide the other Party with written documentation of any such payment that, if applicable, shall be in a form sufficient to satisfy the requirements of the United States Internal Revenue Code relating to a claim by such other Party for a foreign tax credit in respect of such Tax payment. If by law, regulations or fiscal policy of a particular country in the Territory, remittance of royalty payments in United States dollars is restricted or forbidden, written notice thereof shall promptly be given by King to PTI, and such payment shall be made by the deposit thereof in local currency to the credit of PTI in a recognized banking institution designated by PTI. When in any country in the Territory, the law or regulations prohibit both the transmittal and the deposit of payments, such payments shall be suspended for as long as such prohibition is in effect and as soon as such prohibition ceases to be in effect, all payments that King would have been under an obligation to transmit or deposit but for the prohibition shall forthwith be deposited or transmitted, to the extent allowable. 7. TERM AND TERMINATION 7.1 TERM. Unless otherwise terminated by operation of law or by acts of the Parties in accordance with the terms of this Agreement, this Agreement shall continue until the scheduled expiration (and not the earlier termination) of the Collaboration Agreement (the PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. -17- "Term"), except to the extent any of the rights licensed by PTI from Durect under the DLA and sublicensed to King hereunder expire or terminate earlier, pursuant to the terms and conditions of the DLA. 7.2 TERMINATION. This Agreement shall be terminable only upon the conditions and in the manner specified in the Collaboration Agreement, in conjunction with a termination of the Collaboration Agreement, on a Product-by-Product basis or in its entirety. For the avoidance of doubt, termination of the Collaboration Agreement shall automatically terminate this Agreement. 7.3 ACCRUED OBLIGATIONS. Any termination of this Agreement for any reason does not relieve either Party of any obligation or liability accrued prior to the termination or rescind anything done by either Party, and the termination does not affect in any manner any rights of either Party arising under this Agreement prior to the termination. 7.4 TREATMENT UPON BANKRUPTCY. 7.4.1 ASSUMPTION AND ASSIGNMENT OF AGREEMENT. 7.4.1.1 Notwithstanding any other provision of this Agreement, the Collaboration Agreement, or any other related agreements, each Party hereby consents to the assumption of this Agreement by the other Party (the "Debtor Party") in any case commenced by or against the Debtor Party under the Bankruptcy Code to the extent that such consent is required under Section 365(c)(1) of the Bankruptcy Code, but only if the Debtor Party is otherwise entitled to assume this Agreement under the applicable requirements of the Bankruptcy Code. The sole purpose of the foregoing consent is to overcome any restriction potentially imposed by Section 365(c)(1) of the Bankruptcy Code on the Debtor Party's assumption of this Agreement in a bankruptcy case concerning the Debtor Party. It is not intended to limit any other rights of the other Party (the "Non-Debtor Party") under this Agreement or any provision of the Bankruptcy Code, including Section 365(c)(1). The foregoing consent applies only to the assumption of this Agreement by the Debtor Party and does not apply to the Debtor Party's assignment of this Agreement or any rights hereunder to a Third Party. 7.4.1.2 Notwithstanding any other provision of this Agreement (including Sections 7.4.1.3 and 12.9), the Collaboration Agreement, or any other related agreements, the Non-Debtor Party hereby consents to the assignment of this Agreement by the Debtor Party to a Third Party solely in connection with a sale of all or substantially all of the Debtor Party's business or assets relating to this Agreement and the Collaboration Agreement to such Third Party, pursuant to an orderly sale process under Section 363 of the Bankruptcy Code or a confirmed plan under Section 1129 of the Bankruptcy Code, that contemplates the continued operation of the purchased business or assets and, if PTI is the Debtor Party, the retention of the Existing Management Team, provided that such Third Party promptly agrees in writing to be bound by the terms and conditions of this Agreement and the Debtor Party is otherwise entitled to assign this Agreement under the applicable requirements of the Bankruptcy Code. The sole purpose of the foregoing consent is to overcome any restriction potentially imposed by Section 365(c)(1) of the Bankruptcy Code on the Debtor Party's assignment of this Agreement under the specific PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. -18- circumstances described in this Section 7.4.1.2. It is not intended to limit any other rights of the Non-Debtor Party under this Agreement or any provision of the Bankruptcy Code, including Section 365(c)(1), or to apply to the assignment of this Agreement in any other context. 7.4.1.3 Notwithstanding any other provision of this Agreement (including Section 12.9), the Collaboration Agreement, or any other related agreements, but subject to Section 7.4.1.2 above, the Debtor Party may only assign this Agreement to a Third Party in any case commenced by or against it under the Bankruptcy Code with the prior written consent of the Non-Debtor Party. 7.4.2 INTELLECTUAL PROPERTY RIGHTS. This Agreement and all rights related to and licenses of intellectual property granted under this Agreement by one Party to the other Party are, and shall otherwise be deemed to be, for purposes of Section 365(n) of the Bankruptcy Code, licenses of rights to "intellectual property" as defined under Section 101(35A) of the Bankruptcy Code. In addition to any other rights, elections and remedies under this Agreement, any related agreements, the Bankruptcy Code, or any other Applicable Law, upon a written request under Section 365(n) of the Bankruptcy Code, the Non-Debtor Party shall be entitled to complete access to any intellectual property of the Debtor Party pertaining to the rights granted in the licenses under this Agreement, all embodiments of such intellectual property and all documents, material, data, records, analyses, and information related thereto (including all clinical data, INDs, NDAs, Regulatory Approvals, Regulatory Filings, and all other documentation reasonably useful in respect of Product in the Territory in the Field). This Agreement, the Collaboration Agreement and any other related agreements (to the extent such agreements do not constitute licenses of intellectual property under the Bankruptcy Code) shall be considered agreements supplementary (as such term is used in Section 365(n) of the Bankruptcy Code) to this Agreement. 7.4.3 REJECTION IN BANKRUPTCY. Any rejection of this Agreement by the Debtor Party pursuant to Section 365 of the Bankruptcy Code shall constitute a material breach of this Agreement not subject to notice or cure. Upon any such rejection, all rights, elections and remedies of the Non-Debtor Party to this Agreement (including under Section 365 of the Bankruptcy Code) are expressly reserved. Further, upon any such rejection, the Parties intend and agree that the Non-Debtor Party may elect to retain its rights under this Agreement pursuant to Section 365(n) of the Bankruptcy Code and that such election shall, among other things, entitle the Non-Debtor Party to invoke and exercise all of its rights to any intellectual property under this Agreement, the Collaboration Agreement, and any other related agreements. 7.5 SURVIVAL. The terms and conditions of the following provisions shall survive termination or expiration of this Agreement for as long as necessary to permit their full discharge: Articles 9, 11 and 12, the definitions set forth in Annex A, and Sections 2.2.3, 2.2.4, 3.2.1, 3.2.2, 3.2.3, 7.3, 7.5, 10.1, the obligations of the Parties set forth in the first two sentences of Section 10.2, and Sections 6.2, 6.3, 6.4 and 6.5 with respect to any final payments owing to PTI under Section 6.1. Additionally, in the event of expiration of this Agreement (but not the earlier termination), the licenses granted to King in Section 2.1 with respect to PTI Technology PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. -19- and Joint Technology will survive on a non-exclusive, royalty-free, fully-paid up basis. Except as otherwise provided in this Section 7.5, all rights and obligations of the Parties under this Agreement shall terminate upon the expiration or termination of this Agreement. 8. WARRANTIES 8.1 PTI represents and warrants to King that (a) to PTI's actual knowledge, PTI owns or Controls all right, title and interest in and to the PTI Patent Rights, free and clear of any encumbrances, liens, charges, adverse claims, pledges, assignments, licenses, and covenants by PTI not to sue any Third Party; (b) to PTI's actual knowledge, all patent applications within the PTI Patent Rights have been duly prepared, filed, prosecuted and maintained in accordance with all applicable laws, rules and regulations; (c) to PTI's actual knowledge there is no litigation or proceeding pending or threatened concerning the validity or enforceability of any of the PTI Patent Rights, BUT PTI EXPRESSLY DISCLAIMS ANY WARRANTY THAT THE PTI PATENT RIGHTS ARE ACTUALLY VALID OR ENFORCEABLE; (d) PTI has the lawful right to enter into this Agreement and to grant the licenses granted hereunder without the consent or approval of another person or entity that has not been obtained; (e) neither PTI, nor to PTI's actual knowledge, Durect, is in material breach of the DLA and to PTI's actual knowledge the DLA is valid, binding, enforceable and in full force and effect; and (f) to the extent any government funding has been obtained or used in connection with the research and development of any Products or any subject matter disclosed in any of the PTI Patent Rights, including pursuant to any grants from the National Institutes of Health, the terms and conditions of such funding agreements and grants and all laws applicable thereto have been complied with in all material respects. 8.2 King represents and warrants to PTI that it has the lawful right and authority to enter into this Agreement without the consent or approval of another person or entity. 9. INDEMNIFICATION 9.1 INDEMNIFICATION OF KING BY PTI. PTI shall indemnify, defend, and hold harmless King, its Affiliates, and their respective directors, officers, employees, and agents (the "King Indemnitees"), against any liability, damage, loss, or expense (including reasonable attorneys' fees and expenses of litigation) (collectively, "Losses") incurred by or imposed upon the King Indemnitees, or any one of them, as a result of claims, causes of action, suits, actions, demands, or judgments made against such King Indemnitees by Third Parties, including claims for personal injury and claims of suppliers and PTI employees (except in cases where such claims, suits, actions, demands, or judgments result from a material breach by King of its representations or warranties under this Agreement, gross negligence, or willful misconduct on the part of King), in each case to the extent arising out of (a) the breach of any representation or warranty of PTI under Article 8 hereof, (b) the gross negligence or willful misconduct of PTI, its Affiliates, or their respective employees or agents in the performance of any obligation under this Agreement, and (c) any government funding received by PTI prior to the Effective Date of the Collaboration Agreement in connection with the research or development of any Products or any subject matter disclosed in any PTI Patent Rights, including pursuant to any grants from the National Institutes of Health, and the failure of PTI to comply in all material respects with the terms and conditions of such funding agreements and grants, and with all Applicable Laws with PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. -20- respect thereto, including to obtain any necessary permits or waivers thereunder. For purposes of clarity, it is understood and agreed that, except as provided in this Section 9.1 or in Section 11.1 of the Collaboration Agreement, PTI provides no indemnification to King with respect to product liabilities claims relating to Products. 9.2 INDEMNIFICATION OF PTI BY KING. King shall indemnify, defend, and hold harmless PTI, its Affiliates, and their respective directors, officers, employees, and agents (the "PTI Indemnitees"), against any Losses incurred by or imposed upon the PTI Indemnitees, or any one of them, as a result of claims, causes of action, suits, actions, demands, or judgments made against such PTI Indemnitees by Third Parties, including personal injury and claims of suppliers and King employees (except in cases where such claims, suits, actions, demands, or judgments result from a material breach by PTI of its representations or warranties under this Agreement, gross negligence, or willful misconduct on the part of PTI), in each case to the extent arising out of (a) the breach of any representation or warranty of King under Article 8 hereof and (b) the gross negligence or willful misconduct of King, its Affiliates, or their respective employees or agents in the performance of any obligation under this Agreement. For purposes of clarity, it is understood and agreed that, except as provided in this Section 9.2 or the Section 11.2 of the Collaboration Agreement, King provides no indemnification to PTI with respect to product liabilities claims relating to Products. 9.3 CONDITIONS TO INDEMNIFICATION. A Party seeking indemnification under this Article 9 (the "Indemnified Party") shall give prompt notice of the claim to the other Party (the "Indemnifying Party") and, provided that the Indemnifying Party is not contesting the indemnity obligation, shall permit the Indemnifying Party to control any litigation relating to such claim and disposition of any such claim. The Indemnifying Party shall act reasonably and in good faith with respect to all matters relating to the settlement or disposition of any claim as the settlement or disposition relates to Parties being indemnified under this Article 9. The Indemnifying Party shall not settle or otherwise resolve any claim without prior notice to the Indemnified Party and the consent of the Indemnified Party (which consent shall not be unreasonably withheld, conditioned, or delayed) if such settlement involves anything other than the payment of money by the Indemnifying Party. The Indemnified Party shall reasonably cooperate with the Indemnifying Party in its defense of any claim for which indemnification is sought under this Article 9 and shall have the right to be present in person or through counsel at all legal proceedings giving rise to the right of indemnification. For purposes of clarity, it is understood that in the event that a claim is eligible for indemnification under both this Article 9 and under Article 11 of the Collaboration Agreement, the Indemnified Party shall be entitled to seek indemnification for such claim under either this Agreement or the Collaboration Agreement, but not both. 9.4 WARRANTY DISCLAIMER. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS AGREEMENT OR THE COLLABORATION AGREEMENT, NEITHER PARTY MAKES ANY WARRANTY WITH RESPECT TO ANY TECHNOLOGY, GOODS, SERVICES, RIGHTS, OR OTHER SUBJECT MATTER OF THIS AGREEMENT AND HEREBY DISCLAIMS WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, AND NONINFRINGEMENT WITH RESPECT TO ANY AND ALL OF THE FOREGOING. NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS AGREEMENT, NEITHER PARTY MAKES ANY GUARANTEES TO THE OTHER CONCERNING THE SUCCESS OR POTENTIAL SUCCESS OF THE ACTIVITIES CONTEMPLATED UNDER THIS AGREEMENT. PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. -21- 9.5 LIMITED LIABILITY. EXCEPT WITH RESPECT TO A BREACH OF THE OBLIGATIONS IN ARTICLE 10 OR WITH RESPECT TO AMOUNTS PAID TO THIRD PARTIES UNDER THE INDEMNIFICATION OBLIGATIONS OF THIS ARTICLE 9, NEITHER PTI NOR KING WILL BE LIABLE WITH RESPECT TO ANY SUBJECT MATTER OF THIS AGREEMENT UNDER ANY CONTRACT, NEGLIGENCE, STRICT LIABILITY, OR OTHER LEGAL OR EQUITABLE THEORY FOR (I) ANY INDIRECT, INCIDENTAL, CONSEQUENTIAL, OR PUNITIVE DAMAGES OR (II) COST OF PROCUREMENT OF SUBSTITUTE GOODS, TECHNOLOGY, OR SERVICES. 10. CONFIDENTIALITY; PUBLICITY 10.1 CONFIDENTIALITY. 10.1.1 CONFIDENTIALITY OBLIGATIONS. PTI and King each acknowledges and agrees that the other Party's Confidential Information constitutes highly valuable and proprietary confidential information and materials. PTI and King each agrees that during the Term of this Agreement and for an additional five years (or, in the case of any Confidential Information identified as a trade secret by the Disclosing Party at the time of disclosure, for so long as such trade secret Confidential Information is susceptible of remaining a trade secret), it will use commercially reasonable efforts to keep confidential, and will use commercially reasonable efforts to cause its employees, Consultants, Affiliates, agents, advisors, and Sublicensees to keep confidential, all Confidential Information of the other Party. Neither PTI nor King nor any of their respective employees, Consultants, Affiliates, or Sublicensees shall use Confidential Information of the other Party for any purpose whatsoever except as expressly permitted in this Agreement or the Collaboration Agreement. 10.1.2 LIMITED DISCLOSURE. PTI and King each agree that any disclosure of the other Party's Confidential Information to any officer, employee, Consultant, agent, or Affiliate of PTI or King, as the case may be, shall be made only if and to the extent necessary to carry out its rights and responsibilities under this Agreement and the Collaboration Agreement, shall be limited to the maximum extent possible consistent with such rights and responsibilities, and shall only be made to persons who are bound by written confidentiality obligations to maintain the confidentiality thereof and not to use such Confidential Information except as expressly permitted by this Agreement or the Collaboration Agreement. PTI and King each further agrees not to disclose or transfer the other Party's Confidential Information to any Third Parties under any circumstance without the prior written approval from the other Party (such approval not to be unreasonably withheld), except as otherwise required by law, and except as otherwise expressly permitted by this Agreement or the Collaboration Agreement. Each Party shall take such action, and shall cause its Affiliates and Sublicensees to take such action, to preserve the confidentiality of the Disclosing Party's Confidential Information as the Receiving Party would customarily take to preserve the confidentiality of its own Confidential Information, using a level of care that shall not under any circumstances be PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. -22- less than reasonable and prudent care. If a court or other government authority orders that the Receiving Party disclose Confidential Information, or proposes such an order, the Receiving Party must notify the Disclosing Party immediately after learning of the order, so as to provide the Disclosing Party an opportunity to protect the information, and the Receiving Party must limit the disclosure to the minimum that will comply with the order. Each Party, upon the request of the other Party, will return all the Confidential Information disclosed or transferred to it by the other Party pursuant to this Agreement, including all copies and extracts of documents and all manifestations in whatever form, within 60 days of the request or, if earlier, the termination or expiration of this Agreement; provided however, that a Party may retain Confidential Information of the other Party relating to any license or right to use Technology that survives such termination and one copy of all other Confidential Information may be retained in inactive archives solely for the purpose of establishing the contents thereof. 10.1.3 EMPLOYEES AND CONSULTANTS. PTI and King each hereby agrees that all of its employees, and all of the employees of its Affiliates, and any Consultants to such Party or its Affiliates, in any case that participate in the activities of the Development Program and who shall have access to Confidential Information of the other Party shall be bound by written obligations to maintain the same in confidence and not to use such information except as expressly permitted herein. Each Party agrees to enforce confidentiality obligations to which its employees and Consultants (and those of its Affiliates) are obligated. Each Party agrees to have each employee or Consultant that participates in the Development Program enter into a written agreement with such Party that includes an assignment to such Party of all right, title, and interest in and to all work product and all inventions arising during the course of his or her employment with or provision of services to such Party, and all intellectual property rights attaching thereto. 10.1.4 EQUITABLE RELIEF. PTI and King each acknowledges that a breach by it of this Article 10 cannot reasonably or adequately be compensated in damages in an action at law and that such a breach may cause the other Party irreparable injury and damage. By reason thereof, each Party agrees that the other Party may be entitled, in addition to any other remedies it may have under this Agreement or otherwise, to preliminary and permanent injunctive and other equitable relief to prevent or curtail any breach of Article 10 by the other Party; provided, however, that no specification in this Agreement of a specific legal or equitable remedy shall be construed as a waiver or prohibition against the pursuing of other legal or equitable remedies in the event of such a breach. Each Party agrees that the existence of any claim, demand, or cause of action of it against the other Party, whether predicated upon this Agreement, or otherwise, shall not constitute a defense to the enforcement by the other Party, or its successors or assigns, of the covenants contained in Article 10. 10.2 PUBLICITY. Neither Party may publicly disclose the existence or terms of this Agreement without the prior written consent of the other Party. Notwithstanding the foregoing, each Party shall have the right to disclose the existence or terms of this Agreement, or information relating to the Development Program, Remoxy, or other Products, without the consent of the other Party (a) to the extent the disclosure is required by law or by the requirements of any nationally recognized securities exchange, quotation system, or over-the- PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. -23- counter market on which such Party has its securities listed or traded, (b) to any investors, prospective investors, lenders, and other potential financing sources who are obligated to keep such information confidential, or (c) to any Third Party who is obligated by written confidentiality agreement to keep such information confidential; provided, in each case, that the Party making such disclosure shall use reasonable efforts to provide the other Party with as much notice beforehand as is reasonable under the circumstances with respect to any such disclosure. The Parties, upon the execution of this Agreement, will mutually agree to a press release with respect to the Development Program for publication. Once such press release or any other written statement is approved for disclosure by both Parties, either Party may make subsequent public disclosure of the contents of such statement without the further approval of the other Party. Additionally from time-to-time PTI may wish to issue press releases or make similar disclosures regarding the results or status of its research or Product activities, the achievement of a regulatory or development milestone, or any other material achievements under this Agreement or the DLA. Notwithstanding anything to the contrary in Section 10.3 or this Section 10.2, PTI shall be free to issue such press releases or make such disclosures, and shall have the right to choose the wording and timing of any such press releases and disclosures; provided that PTI agrees to provide King a draft copy of any such press release or disclosure at least twelve (12) hours prior to its publication or disclosure, which copy in any event must be provided during normal business hours, and provided further that such disclosure does not mention King without King's prior written consent. King shall have the right to inform PTI of any information contained therein that King believes is inaccurate. 10.3 PUBLICATION. It is expected that each Party may wish to publish the results of its research under this Agreement and the DLA in scientific journals or through scientific conferences, which disclosures will be subject to the obligations of this Section 10.3. At any time prior to the filing of an NDA for a particular Product, PTI may publish the results of its research for such Product in scientific journals or through scientific conferences; provided that PTI complies with the provisions of this Section 10.3; and provided further that such publication does not mention King without King's prior written consent. At any time following the filing of an NDA for a particular Product, King may publish the results of its research for such Product in scientific journals or through scientific conferences; provided that King complies with the provisions of this Section 10.3; and provided further that such publication does not mention PTI without PTI's prior written consent. In order to safeguard patent rights and other intellectual property, the Party wishing to publish in any scientific journal or at any scientific conference the results of any research being conducted by the Parties in the Development Program shall first submit a draft of each proposed technical publication or an outline of each proposed presentation for a scientific conference, with any related materials to be published or distributed in connection therewith, to the other Party for review, comment, and consideration of appropriate patent action at least thirty (30) days prior to any submission for publication (or in the case of a disclosure in connection with a scientific conference, at least fifteen (15) days prior to such disclosure). Within fifteen (15) days of receipt of the prepublication materials (or as soon as practicable in connection with an outline of an oral presentation), the other Party will notify the Party seeking publication as to whether a patent application shall be prepared and filed (in which case the Party seeking publication shall delay submission until the first to occur of the filing of a patent application and thirty (30) days from such notice provided by the JOC) or whether such publication must be revised to eliminate Confidential Information of a Party (in which case the Party seeking publication shall delete from any proposed publication all such Confidential Information contained therein). PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. -24- 11. REMEDIES Subject to the terms of this Agreement, the Parties are not excluded from exercising or seeking any and all rights and remedies available, in law or in equity, under Applicable Law. 12. MISCELLANEOUS 12.1 NOTICES. All notices or other communications that shall or may be given pursuant to this Agreement shall be in writing and shall be deemed to be effective (a) simultaneously with the transmission or delivery thereof, if sent by facsimile transmission (followed by hard copy by mail), (b) when delivered, if sent by United States registered or certified mail, return receipt requested, or (c) on the next business day, if sent by overnight courier, in each case to the Parties at the following addresses (or at such other addresses as shall be specified by like notice) with postage or delivery charges prepaid: If to King: If to PTI: King Pharmaceuticals, Inc. Pain Therapeutics, Inc. 501 Fifth Street 416 Browning Way Bristol, Tennessee 37620 South San Francisco, California 94080 Tel.: (423) 989-8000 Tel.: (650) 825-3342 Fax: (423) 990-2566 Fax: (650) 624-8222 Attention: General Counsel Attention: President & CEO With a copy to: With a copy to: King Pharmaceuticals, Inc. Wilson Sonsini Goodrich & Rosati 501 Fifth Street 650 Page Mill Road Bristol, Tennessee 37620 Palo Alto, California 94304-1050 Tel.: (423) 989-8000 Tel.: (650) 493-9300 Fax: (423) 274-2602 Fax: (650) 493-6811 Attention: Business Development Attention: Michael O'Donnell 12.2 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without regard to the application of principles of conflicts of law. 12.3 BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of the Parties and their respective legal representatives, successors, and permitted assigns. 12.4 COUNTERPARTS. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original. 12.5 AMENDMENT; WAIVER. This Agreement may be amended, modified, superseded, or canceled, and any of the terms may be waived, only by a written instrument executed by each PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. -25- Party or, in the case of waiver, by the Party or Parties waiving compliance. The delay or failure of any Party at any time or times to require performance of any provisions shall in no manner affect the rights at a later time to enforce the same. No waiver by any Party of any condition or of the breach of any term contained in this Agreement, whether by conduct, or otherwise, in any one or more instances, shall be deemed to be, or considered as, a further or continuing waiver of any such condition or of the breach of such term or any other term of this Agreement. 12.6 NO THIRD PARTY BENEFICIARIES. No Third Party, including any employee of any Party to this Agreement, shall have or acquire any rights by reason of this Agreement. 12.7 PURPOSES AND SCOPE. The Parties hereto understand and agree that this Development Program is limited solely to the Field in the Territory, and to the activities, rights, and obligations as set forth in this Agreement. Nothing in this Agreement shall be construed (a) to create or imply a general partnership between the Parties, (b) to make either Party the agent of the other for any purpose, (c) to alter, amend, supersede, or vitiate any other arrangements between the Parties with respect to any subject matters not covered hereunder, (d) to give either Party the right to bind the other, (e) to create any duties or obligations between the Parties except as expressly set forth herein, or (f) to grant any direct or implied licenses or any other right other than as expressly set forth herein. 12.8 PERFORMANCE BY AFFILIATES. Each Party shall have the right to direct its wholly-owned Affiliates to act in satisfaction of such Party's or Affiliate's obligations hereunder or make an assignment to an Affiliate in accordance with Section 12.9; provided that such Party shall remain liable and fully responsible for the performance of such Affiliate hereunder. 12.9 ASSIGNMENT AND SUCCESSORS. Neither this Agreement nor any obligation of a Party hereunder may be assigned by either Party without the consent of the other, except that, subject to Section 7.4.1, each Party may assign this Agreement and the rights, obligations, and interests of such Party, in whole or in part, to any of its Affiliates (subject to Section 12.8) or to any Third Party that succeeds to all or substantially all of a Party's business or assets relating to this Agreement and the Collaboration Agreement, whether by sale, merger, operation of law, or otherwise; provided that such assignee or transferee promptly agrees in writing to be bound by the terms and conditions of this Agreement. Any attempted assignment in violation of this Section 12.9 shall be null, void, and of no effect. This Agreement shall be binding upon and inure to the benefit of all permitted successors-in-interest and assigns. 12.10 FORCE MAJEURE. In the event of the occurrence of a Force Majeure Event, the Parties shall not be deemed in breach of their obligations to the extent of the Force Majeure Event. The Party affected thereby shall use reasonable efforts to cure or overcome the same and resume performance of its obligations hereunder. 12.11 INTERPRETATION. 12.11.1 The Parties hereto acknowledge and agree that: (i) each Party and its counsel reviewed and negotiated the terms and provisions of this Agreement and have contributed to its revision; (ii) the rule of construction to the effect that any ambiguities are resolved against the drafting Party shall not be employed in the interpretation of this PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. -26- Agreement; and (iii) the terms and provisions of this Agreement shall be construed fairly as to all Parties hereto and not in a favor of or against any Party, regardless of which Party was generally responsible for the preparation of this Agreement. 12.11.2 The headings contained in this Agreement are for reference purposes only and will not affect in any way the meaning or interpretation of this Agreement. Whenever the words "include," "includes," or "including" are used in this Agreement, they will be deemed to be followed by the words "without limitation." Unless the context otherwise requires, (i) "or" is disjunctive but not necessarily exclusive, (ii) words in the singular include the plural and vice versa, and (iii) the use in this Agreement of a pronoun in reference to a Party hereto includes the masculine, feminine, or neuter, as the context may require. The Annex hereto will be deemed part of this Agreement and included in any reference to this Agreement. 12.12 INTEGRATION; SEVERABILITY. This Agreement and the Collaboration Agreement are the sole agreements with respect to the subject matter hereof and supersede all other agreements and understandings between the Parties with respect to same. If any provision of this Agreement is or becomes invalid or is ruled invalid by any court of competent jurisdiction or is deemed unenforceable, such provision or portion thereof will be modified or deleted in such a manner so as to make this Agreement, as modified, legal and enforceable to the fullest extent permitted under Applicable Law, and it is the intention of the Parties that the remainder of the Agreement shall not be affected. 12.13 FURTHER ASSURANCES. Each of PTI and King agrees to duly execute and deliver, or cause to be duly executed and delivered, such further instruments and do and cause to be done such further acts and things, including the filing of such additional assignments, agreements, documents, and instruments, that may be necessary or as the other Party hereto may at any time and from time to time reasonably request in connection with this Agreement or to carry out more effectively the provisions and purposes of, or to better assure and confirm unto such other Party its rights and remedies under, this Agreement. [SIGNATURE PAGE FOLLOWS] PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. -27- IN WITNESS WHEREOF, both King and PTI have executed this Agreement, by their respective officers duly authorized, on the day and year written below. KING PHARMACEUTICALS, INC. PAIN THERAPEUTICS, INC. By: /s/ Brian A. Markison By: /s/ Remi Barbier --------------------------------- ------------------------------------ (Signature) (Signature) Name: Brian A. Markison Name: Remi Barbier Title: President and Chief Executive Title: President & CEO Officer Date: December 29, 2005 Date: December 29, 2005 PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. ANNEX A DEFINITIONS TO LICENSE AGREEMENT 1. "AFFILIATE" means any corporation, firm, partnership, or other entity that directly or indirectly controls or is controlled by or is under common control with a Party to this Agreement. For purposes of this definition, "control" means ownership, directly or through one or more Affiliates, of (a) 50% or more of the shares or voting rights in the case of a corporation or limited company, (b) 50% or more of the shares of stock entitled to vote for the election of directors, in the case of a corporation, (c) 50% or more of the equity or controlling interests in the case of any other type of legal entity (including joint ventures) or status as a general partner in any partnership, or (d) any other arrangement whereby a Party controls or has the right to control the Board of Directors or equivalent governing body of an entity. 2. "AGREEMENT" means this License Agreement, including all attached annexes, as well as all amendments, supplements, and restatements thereof. 3. "API" means, with respect to a Product, the active pharmaceutical ingredient used in the Product. 4. "APPLICABLE LAW" means applicable U.S. and foreign laws, rules, regulations, guidelines, and standards, including those of the FDA and comparable foreign Regulatory Authorities. 5. "BANKRUPTCY CODE" means the U.S. Bankruptcy Code, 11 U.S.C. Sections 101 et seq. 6. "CALENDAR QUARTER" means, with respect to the first such Calendar Quarter, the period beginning on the Closing Date and ending on the last day of the calendar quarter within which the Closing Date falls and, thereafter, each successive period of three consecutive calendar months ending on March 31, June 30, September 30, or December 31. In the event that the termination of this Agreement does not fall on the last day of a Calendar Quarter, the "FINAL CALENDAR QUARTER" shall mean the period from the last day of the most recent Calendar Quarter through the applicable date of termination of this Agreement. 7. "CALENDAR YEAR" means each successive twelve (12)-month period commencing on January 1 and ending on December 31; provided that the first such Calendar Year shall begin on the Closing Date and end on December 31, 2005. In the event that the termination of this Agreement does not fall on the last day of a Calendar Year, the "FINAL CALENDAR YEAR" shall mean the period from the last day of the most recent Calendar Year through the applicable date of termination of this Agreement. 8. "CLOSING DATE" shall mean the earlier of: (a) the third day, unless the first day falls on a weekend or holiday, in which case it shall be the next business day, after the expiration or termination of all applicable waiting periods under the HSR Act and the satisfaction of all the other conditions set forth in Section 6.1.3 of the Collaboration Agreement or (b) the third day, unless the first day falls on a weekend or holiday, in which case it shall be the next business day, after the joint determination (by certification from each Party to the other) that notification under the HSR Act is not required and the satisfaction of all the other conditions set forth in Section 6.1.3 of the Collaboration Agreement. PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. Annex A-1 9. "CMC" means, with respect to a Product, the chemistry, manufacturing, and controls information that would typically be, or is, included in an IND or NDA for such Product. 10. "COLLABORATION" means the association of PTI and King established pursuant to the Collaboration Agreement for the purpose of conducting the Development of Products so as to accomplish the Development objectives of the Development Program. 11. "COLLABORATION AGREEMENT" has the meaning set forth in the recitals hereof. 12. "CONFIDENTIAL INFORMATION" means all information, Technology, and Proprietary Materials that are disclosed to a Party (the "Receiving Party") by or on behalf of the other Party (the "Disclosing Party") hereunder or under this Agreement or disclosed to any of the Receiving Party's employees, Consultants, Affiliates, or Sublicensees, except to the extent that any such information (a) as of the date of disclosure is known to the Receiving Party or its Affiliates, as demonstrated by credible written documentation; (b) as of the date of disclosure is in, or subsequently enters, the public domain, through no fault or omission of the Receiving Party; (c) is obtained from a Third Party having a lawful right to make such disclosure free from any obligation of confidentiality to the Disclosing Party; or (d) is independently developed by or for the Receiving Party without reference to or reliance upon any Confidential Information of the Disclosing Party as demonstrated by credible written documentation. It is further agreed that PTI Technology shall be deemed the Confidential Information of PTI, King Technology shall be deemed the Confidential Information of King, and Joint Technology shall be deemed the Confidential Information of both Parties. During the Term hereof, neither Party shall disclose any of its own Confidential Information in such a manner that would reasonably be expected to adversely impact any intellectual property rights or commercial interests of the Development Program or the Products, unless such disclosure is subject to confidentiality obligations as strict as those contained in the Collaboration Agreement or this Agreement. 13. "CONSULTANT" means a Third Party who has entered into or hereafter enters into a written agreement with PTI or King or both to provide consulting services that are material or are reasonably likely, in the judgment of the JOC, to become material to the Development Program, which written agreement shall (a) include an assignment of all right, title, and interest in and to all work product and all inventions arising from the performance of such agreement, and all intellectual property rights attaching thereto, to PTI or King, as applicable, and (b) bind the relevant Third Party by obligations of confidentiality and non-use with respect to all such work product, inventions, Confidential Information, and intellectual property rights that are at least as stringent as those set forth herein. 14. "CONTROL" or "CONTROLLED" means, (a) with respect to Technology (other than Proprietary Materials) or Patent Rights, the possession by a Party of the ability to grant a license or sublicense of such Technology or Patent Rights as provided herein without the payment of additional consideration (other than any additional consideration to be paid pursuant to the DLA) and without violating the terms of any agreement or arrangement between such Party and any Third Party and, (b) with respect to Proprietary Materials, the possession by a Party of the ability to supply such Proprietary Materials to the other Party as provided herein without the payment of additional consideration and without violating the terms of any agreement or arrangement between such Party and any Third Party. PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. Annex A-2 15. "[***]" means any dosage form that is covered by any patent or patent application set forth on Schedule 22 to the Collaboration Agreement (the "Existing Patents"), as well as any continuations, divisionals, continuations-in-part (to the extent any claims thereof are entitled to claim priority to the filing date of any of the Existing Patents), patents of addition, and substitutions of the Existing Patents, together with all registrations, reissues, reexaminations or extensions of any kind with respect to any of the foregoing patents, in each case to the extent same are owned or controlled by PTI. In the event PTI reasonably believes that any claims of a continuation-in-part application of any of the Existing Patents, which claims are not entitled to claim priority to the filings date of any of the Existing Patents, cover only an incremental improvement to the subject matter described and claimed in the Existing Patents, PTI shall have the right to request that King permit such additional claims to be included within the definition of [***], and King shall consider such request in good faith. Notwithstanding the foregoing, with respect to United States Application Serial Nos. [***], and any applications or patents that claim priority to either of same, to the extent that any claims cover a dosage form of an opioid agonist alone or a method or process of using or making such a dosage form, such claims shall not be within the definition of [***], but shall be considered PTI Technology and PTI Patent Rights (and such applications and issued patents will be included on the schedule of PTI Patent Rights solely to such extent). 16. "[***]" means any dosage form of a [***] that (a) contains [***] as the only opioid agonist API and (b) is covered by the rights granted to PTI under the DLA. 17. "CTM" or "CLINICAL TRIAL MATERIALS" means any Product manufactured, packaged, and labeled as required by Applicable Law to be used as an investigational drug or placebo for use in the conduct of clinical trials in humans. 18. "DEBTOR PARTY" has the meaning set forth in Section 7.4.1.1 of this Agreement. 19. "DEVELOPMENT" or "DEVELOP" means, with respect to a Product, all research, pre-clinical, pharmaceutical, clinical, and regulatory activities and all other activities undertaken in order to obtain Regulatory Approval of such Product in accordance with the Collaboration Agreement prior to Regulatory Approval of such Product. These activities shall include, among other things: test method development, CMC methods and reports (including formulation, process development, development-stage manufacturing, manufacturing scale-up, technical transfer, quality assurance, and quality control), pre-clinical pharmacology and toxicology studies and associated reports, planning and conduct of clinical studies, protocols, clinical study reports, statistical analysis plans, and clinical quality assurance prior to obtaining Regulatory Approvals, obtaining Regulatory Approvals, and regulatory affairs related to the foregoing. 20. "DEVELOPMENT PLANS" means the written plans (which shall include detailed strategy, budget, and proposed timelines) describing the pre-clinical and clinical Development activities and the regulatory activities, including a general overview of the expected schedule of meetings, discussions, and correspondence with Regulatory Authorities to be carried out for each Product during each Calendar Year pursuant to the Collaboration Agreement, which plans shall include the expected Regulatory Filings to be completed and maintained by the Collaboration for PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. Annex A-3 each Product. The Development Plans will be amended from time to time to include statistical analysis plans, protocols, case report forms, clinical study reports, audit reports, and similar matters, as such matters are developed during the Collaboration. Without limiting the foregoing, such plans shall include, at a minimum, the activities required to remain in compliance with the terms and obligations applicable to PTI under the DLA. Each Development Plan will be set forth in a written document prepared by the Parties pursuant to Section 3.4 of the Collaboration Agreement, and a separate Development Plan will be generated and approved with respect to each Product. 21. "DEVELOPMENT PROGRAM" means, collectively, (a) the collaborative development program in the Field conducted by PTI and King and (b) the marketing program in the Field conducted by King, in each case, commencing on the date hereof and conducted pursuant to the Collaboration Agreement and the Program Plans. 22. "DURECT LICENSE AGREEMENT" or "DLA" means the Development and License Agreement, dated as of December 19, 2002, by and among PTI, DURECT Corporation ("DURECT"), and Southern BioSystems, Inc., a copy of which has been provided to King, as it may be amended from time to time hereafter in accordance with Section 2.4 of this Agreement. 23. "EFFECTIVE DATE" has the meaning set forth in the first paragraph of the Collaboration Agreement. 24. "EXISTING MANAGEMENT TEAM" means not less than fifty percent (50%) of the individuals who, as of the date that is one year prior to the commencement of any case by or against PTI under the Bankruptcy Code, are designated as "Officers" of PTI under Rule 16a-1(f) promulgated pursuant to the Securities Exchange Act of 1934, as amended. 25. "FDA" means the United States Food and Drug Administration or any successor agency. 26. "FIELD" means pharmaceutical formulations for use in humans that contain no more than one opioid API formulated using the SABER Technology, in accordance with the DLA. 27. "FILING PARTY" has the meaning set forth in Section 4.3 of this Agreement. 28. "FIRST COMMERCIAL SALE" means, with respect to any product, the first arm's-length sale by King, its Affiliates, or Sublicensees to a Third Party for end-use or consumption, including any sale to a wholesaler or distributor, of such product in a country after the applicable Regulatory Authority has granted Regulatory Approval. For purposes of this definition, any sale to an Affiliate or Sublicensee will not constitute a First Commercial Sale. 29. "FORCE MAJEURE EVENT" means an event beyond the reasonable control of a Party that prevents the performance, in whole or in part, by the Party of any of its obligations hereunder, including by reason of any act of God, flood or other inclement weather patterns, fire, explosion, earthquake, or war, terrorist act, revolution, civil commotion, acts of public enemies, blockage or embargo, or the like, or any injunction, law, order, ordinance, or requirement of any government or of any subdivision, authority, or representative of any such government, if, and only if, the Party affected shall have used commercially reasonable efforts to avoid the effects of such occurrence and to remedy it promptly if it has occurred. PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. Annex A-4 30. "GAAP" means United States generally accepted accounting principles of the Party performing the applicable work, consistently applied. 31. "GMP" means the minimum standards for methods to be used in, and the facilities or controls to be used for, the manufacture, processing, packing, or holding of a drug to assure that such drug meets the requirements of the Federal Food, Drug and Cosmetic Act of 1938, or its foreign equivalent, as amended, as to safety, and has the identity and strength and meets the quality and purity characteristics that it purports or is represented to possess. In the U.S. Territory, Good Manufacturing Practices are established through FDA regulations (including 21 CFR Parts 210-211), FDA guidances, FDA current review and inspection standards, and current industry standards. 32. "HSR ACT" means the Hart-Scott-Rodino Act of 1976, as amended. 33. "IND" means (a) an Investigational New Drug Application (as defined in 21 CFR Section 312.3) that is required to be filed with the FDA before beginning clinical testing of a Product in human subjects, or any successor application or procedure, or (b) any counterpart of a U.S. Investigational New Drug Application that is required in any other country or region in the Territory before beginning clinical testing of a Product in human subjects in such country or region. 34. "INDEMNIFIED PARTY" has the meaning set forth in Section 9.3 of this Agreement. 35. "INDEMNIFYING PARTY" has the meaning set forth in Section 9.3 of this Agreement. 36. "INFRINGEMENT NOTICE" has the meaning set forth in Section 4.5.1 of this Agreement. 37. "INVENT" or "INVENTED" means (a) with respect to patentable Technology, to invent or discover, as such terms are used in 35 U.S.C. Section 101 and (b) with respect to non-patentable Technology, to discover, make or otherwise develop. 38. "JOINT OVERSIGHT COMMITTEE" or "JOC" means the committee of PTI and King representatives established pursuant to Section 2.1 of the Collaboration Agreement to administer the affairs of the Development Program. 39. "JOINT PATENT RIGHTS" means Patent Rights claiming Joint Technology, as set forth on Schedule 53 to the Collaboration Agreement, which may be amended from time to time as necessary to accurately reflect the foregoing. 40. "JOINT TECHNOLOGY" means any Technology jointly Invented by employees of King and PTI, or Consultants to King and PTI, during and in the conduct of the Development Program. PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. Annex A-5 41. "KING" has the meaning set forth in the first paragraph of this Agreement. 42. "KING BACKGROUND TECHNOLOGY" means any Technology that is useful in the Field or that is actually used in the Development, making or Marketing of Products and that is Controlled by King on the Closing Date. 43. "KING INDEMNITEES" has the meaning set forth in Section 9.1 of this Agreement. 44. "KING PATENT RIGHTS" means all Patent Rights that are Controlled by King and that claim King Technology, as set forth on Schedule 58 to the Collaboration Agreement, which may be amended from time to time as necessary to accurately reflect the foregoing. 45. "KING PROGRAM TECHNOLOGY" means any Technology that is (a) Invented by employees of, or Consultants to, King, alone or jointly with Third Parties (other than Consultants of PTI), in the conduct of the Development Program or (b) useful in the Field or that is actually used in the Development, manufacturing or Marketing of Products and that are acquired by King after the Closing Date pursuant to a Third Party Agreement. 46. "KING TECHNOLOGY" means, collectively, King Background Technology and King Program Technology. 47. "LOSSES" has the meaning set forth in Section 9.1 of this Agreement. 48. "MANUFACTURING/CMC PLANS" means the written CMC and manufacturing plans (which shall include a detailed strategy, budget, and proposed timelines) describing the API, synthesis, choice of manufacturers and Third Party suppliers, expected manufacturing scale-up, manufacture, formulation, process development, development-stage manufacture, clinical supplies manufacturing, quality assurance/quality control development, stability, filling, packaging and labeling, and shipping requirements for each Product (in accordance with customary standards for a product of comparable market potential), including all CMC, and the activities to be carried out by each Party during the applicable Calendar Year. Each Manufacturing/CMC Plan will be set forth in a written document prepared by the Parties pursuant to Section 3.5 of the Collaboration Agreement, and a separate Manufacturing/CMC Plan will be generated and approved with respect to each Product. 49. "MARKET" or "MARKETING" means any and all activities directed to the marketing, detailing, and promotion of a Product for commercial sale and shall include pre-launch and post-launch marketing, mandated and non-mandated risk-management policies and procedures, market surveillance activities, promoting, detailing, distributing (including the cost and distribution of Product samples), offering to sell, and selling a Product, importing a Product for sale, and any and all Product Development conducted after obtaining marketing approval for any Product that is not performed as a condition to the first Regulatory Approval for a Product. If a Phase IV trial is performed as a condition to fulfill an obligation for Regulatory Approval for a Product, such trial shall be considered a Development activity (but not Product Development). 50. "NDA" means a New Drug Application (or an abbreviated New Drug Application) to market the Product in the Territory or similar application submitted to the FDA, or its foreign equivalent submitted to any Regulatory Authority in the Territory, and all supplements and amendments thereto. PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. Annex A-6 51. "NET SALES" means the gross amount invoiced by King its Affiliates or Sublicensees, to Third Parties for sale of Products, less, to the extent deducted from such amount or on such invoice consistent with GAAP, the following items: (a) quantity, trade or cash discounts, chargebacks, returns, allowances, rebates (including any and all federal, state or local government rebates, such as Medicaid rebates) and price adjustments, to the extent actually allowed; (b) sales and other excise taxes and duties or similar governmental charges levied on such sale, to the extent such items are included in the gross invoice price; (c) amounts actually refunded due to rejected, spoiled, damaged, outdated or returned Product; and (d) freight, shipment and insurance costs actually incurred in transporting Product to a Third Party purchaser. If any Products are sold to Third Parties in transactions that are not at arm's length between the buyer and seller, or for consideration other than cash, then the gross amount to be included in the calculation of Net Sales for such sales shall be the amount that would have been invoiced had the transaction been conducted at arm's length, which amount shall be determined, whenever possible, by reference to the average selling price of the relevant Product in arm's-length transactions in the country of sale at the time of sale. Net Sales shall not include amounts invoiced for the supply, disposal of Product for, or use of Product, in clinical or pre-clinical trials or as free samples (such samples to be in quantities common in the industry for this sort of Product). 52. "NON-DEBTOR PARTY" has the meaning set forth in Section 7.4.1.1 of this Agreement. 53. "PARTY" or "PARTIES" has the meaning set forth in the first paragraph of this Agreement. 54. "PATENT COORDINATOR" has the meaning set forth in Section 3.2.4 of this Agreement. 55. "PATENT RIGHTS" means the rights and interests in and to issued patents and pending patent applications (which for purposes of this Agreement shall be deemed to include certificates of invention and applications for certificates of invention and priority rights) in any country, including all provisional applications, substitutions, continuations, continuations-in-part, divisions, and renewals, all letters patent granted thereon, and all reissues, reexaminations and extensions thereof. 56. "PHASE II" means a human clinical trial or trial program in any country that is intended to evaluate the safety and efficacy of a Product's dose and dose regimen in a specific indication the Product is intended to treat. 57. "PRODUCT" means (a) any dosage form of Remoxy, and (b) any other product in the Field (i) that incorporates the SABER Technology and is covered by the rights licensed to PTI under the DLA, and (ii) that is Developed or Marketed pursuant to the Collaboration Agreement. For purposes of clarity, "Product" includes those products within the Field that the Parties have agreed to Develop and Market as of the Effective Date, as well as any and all other products in the Field that King actually designates to be Developed or Marketed under the Collaboration Agreement during the Term thereof. PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. Annex A-7 58. "PRODUCT DEVELOPMENT" means (a) with respect to the U.S. Territory, the conduct by King and its Affiliates of additional clinical studies of a Product that has previously received Regulatory Approval from the FDA, which additional clinical studies are conducted using CTM that is in the same formulation and dosage form as the Product for which Regulatory Approval was previously obtained, and (b) with respect to the ROW, the conduct by King, its Affiliates, or its Sublicensees of clinical studies of a Product, which additional clinical studies are conducted using CTM that is in the same formulation and dosage form as the Product for which Regulatory Approval was previously obtained in the U.S. Territory (or if Regulatory Approval has not yet been obtained in the U.S. Territory, then using CTM in the same formulation(s) and dosage form(s) then being utilized by PTI under the Development Plan for such Product in the U.S. Territory). For purposes of clarity, Product Development shall include the right (i) to use the clinical data generated in such clinical studies to seek additional Regulatory Approvals for a Product and engage in associated regulatory activities and (ii) to develop new indications for a Product with the same formulation and dosage form and to develop additional support for the Product generally. 59. "PRODUCT TRADEMARK(S)" means any trademarks and trade names, whether or not registered, and any trademark applications, renewals, extensions or modifications thereto in the Territory together with all goodwill associated therewith, trade dress and packaging which are applied to or used with Products, and any promotional materials relating thereto. 60. "PROGRAM PLANS" means the Development Plans, the Manufacturing/CMC Plans, and the Yearly Brand Plans. 61. "PROPRIETARY MATERIALS" means any tangible chemical, biological or physical research materials. 62. "PTI" has the meaning set forth in the first paragraph of this Agreement. 63. "PTI BACKGROUND TECHNOLOGY" means any Technology that is useful in the Field or that is actually used in the Development, manufacturing or Marketing of Products and that is Controlled by PTI on the Closing Date, expressly including all rights licensed to PTI pursuant to the DLA. 64. "PTI INDEMNITEES" has the meaning set forth in Section 9.2 of this Agreement. 65. "PTI PATENT RIGHTS" means all Patent Rights that are Controlled by PTI and that claim PTI Technology, expressly including all rights licensed to PTI pursuant to the DLA, all as set forth on Schedule 85 to the Collaboration Agreement, which may be amended from time to time as necessary to accurately reflect the foregoing. 66. "PTI PROGRAM TECHNOLOGY" means any Technology that is (a) Invented by employees of, or Consultants to, PTI, alone or jointly with Third Parties (other than Consultants of King), in the conduct of the Development Program or (b) useful in the Field or that is actually used in the Development, manufacturing or Marketing of Products and that are acquired by PTI after the Closing Date pursuant to a Third Party Agreement. PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. Annex A-8 67. "PTI TECHNOLOGY" means, collectively, PTI Background Technology and PTI Program Technology. 68. "REGULATORY APPROVAL" means approval by the FDA or other Regulatory Authority to market a product in a regulatory jurisdiction. 69. "REGULATORY AUTHORITY" means the FDA, the Drug Enforcement Administration, or any counterpart of such agencies outside the United States, or other national, supra-national, regional, state, or local regulatory agency, department, bureau, commission, council, or other governmental entity with authority over the distribution, importation, exportation, manufacture, production, use, storage, transport, or clinical testing, pricing, or sale of a Product, including any device incorporating the Product. 70. "REGULATORY FILINGS" means, collectively, any and all INDs and drug master files, NDAs, applications for any device incorporating the Product, applications for designation of a Product as an "Orphan Product(s)" under the Orphan Drug Act or any other similar filings (including any foreign equivalents and further including any related correspondence and discussions), and all data contained therein, as may be required by or submitted to any Regulatory Authority for the Regulatory Approval. 71. "REMOXY" means a drug product in the Field that contains oxycodone as its opioid API and that is formulated using the SABER Technology. 72. "ROW" means all countries and jurisdictions in the Territory, other than the U.S. Territory. 73. "SABER TECHNOLOGY" means the pharmaceutical formulation technology and methods of use that are covered by the rights granted to PTI pursuant to the DLA. 74. "SUBLICENSEE" means any Third Party to which a Party or both Parties grant a sublicense of some or all of the rights granted to such Party under the Collaboration Agreement or this Agreement, as permitted by the Collaboration Agreement or this Agreement. 75. "TAXES" means, collectively, taxes, deductions, duties, levies, fees, or charges (including any interest or penalties imposed thereon or related thereto. 76. "TECHNOLOGY" means and includes all inventions, discoveries, improvements, trade secrets and proprietary methods and materials, including Proprietary Materials, whether or not patentable, relating to the Field, including (a) samples of, methods of production or use of, and structural and functional information pertaining to, chemical compounds, proteins or other biological substances and (b) data, formulations, techniques and know-how (including any negative results). 77. "TERM" means the term of this Agreement as set forth in Section 7.1 of this Agreement. PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. Annex A-9 78. "TERRITORY" means worldwide, including the U.S. Territory, but excluding Australia and New Zealand. 79. "TERMINATED PRODUCT" has the meaning set forth in Section 3.1.4 of the Collaboration Agreement. 80. "THIRD PARTY" means any person or entity other than King and PTI and their respective Affiliates. 81. "THIRD PARTY AGREEMENTS" has the meaning set forth in Section 3.8 of the Collaboration Agreement. 82. "U.S. TERRITORY" means the United States, including Puerto Rico, and any other U.S. protectorates, territories, and possessions. 83. "VALID CLAIM" means a claim of a pending patent application or an issued unexpired patent which, in each case, shall not have been withdrawn, canceled or disclaimed, or held unpatentable, invalid or unenforceable by a court or other tribunal of competent jurisdiction in an unappealed or unappealable decision. 84. "YEARLY BRAND PLANS" means the written Marketing plans (which shall include a detailed strategy and proposed timelines to be undertaken) describing the activities to be carried out by King during each applicable Calendar Year pursuant to the Collaboration Agreement. Each Yearly Brand Plan will be set forth in a written document prepared by King and reviewed by the JOC pursuant to Section 3.6 of the Collaboration Agreement, and a separate Yearly Brand Plan will be generated and approved with respect to each Product. PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. Annex A-10 EXHIBIT B DURECT CONSENT PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. [PAIN THERAPEUTICS, INC. GRAPHIC] PAIN THERAPEUTICS, INC. November 2, 2005 Jim Brown, D.V.M. President & CEO DURECT Corporation 10240 Bubb Road Cupertino, CA 95104 RE: APPROVAL OF SUBLICENSEE Dear Jim: Pursuant to Section 8.3 of the Development and License Agreement entered into by DURECT Corporation, Southern BioSystems, Inc., (collectively "Durect") and Pain Therapeutics, Inc. ("PTI") dated as of December 19, 2002 (the "Agreement"), I would like to inform you of PTI's intention to grant a sublicense to King Pharmaceuticals, Inc. ("King") to make and sell Licensed Products in the Territory (as such terms are defined in the Agreement). Please sign below to indicate DURECT's approval of PTI's selection of King as a Sublicensee (as such term is defined in the Agreement) and return this letter to me by Friday, November 4th. A duplicate original is enclosed for your records. Time is of the essence. Best Regards, /s/ Remi Barbier - -------------------------------------------------------------------------------- Remi Barbier Agreed and accepted: DURECT CORPORATION - ------------------ /s/ Jim Brown, D.V.M. Nov. 3, 2005 - ------------------------------------------ ------------------------------------ Jim Brown, D.V.M. Date President & CEO CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. EX-10.37 6 g99351exv10w37.txt EX-10.37 LICENSE AGREEMENT - MUTUAL PHARMACEUTICAL COMPANY, INC. EXHIBIT 10.37 EXECUTION COPY LICENSE AGREEMENT LICENSE AGREEMENT (this "Agreement") dated as of December 6, 2005 (the "Effective Date") by and between MUTUAL PHARMACEUTICAL COMPANY, INC., a Pennsylvania corporation, having its principal place of business at 1100 Orthodox Street, Philadelphia, PA 19124 (hereinafter referred to as "Mutual") and KING PHARMACEUTICALS, INC., a Tennessee corporation, having its principal place of business at 501 Fifth Street, Bristol, Tennessee 37620 (hereinafter referred to as "Licensee"). INTRODUCTION WHEREAS, Mutual possesses certain intellectual property pertaining to the pharmaceutical active ingredient known as metaxalone; and WHEREAS, Licensee desires to license the use of such intellectual property upon the terms and conditions set forth herein, including without limitation, the royalties payable by Licensee to Mutual set forth herein, which reflect the combined value of the know-how and patent rights licensed hereunder; NOW, THEREFORE, in consideration of the mutual covenants and promises contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Mutual and Licensee agree as follows: DEFINITION. 1.1 "Affiliate" means any person, corporation, company, partnership, joint venture, firm or other entity which controls, is controlled by or is under common control with a Party. For purposes of this Section 1.1, "control" shall mean (a) in the case of corporate entities, direct or indirect ownership of at least fifty percent (50%) (or, if less, the maximum allowed by relevant law) of the stock or shares entitled to vote for the election of directors and (b) in the case of non-corporate entities, direct or indirect ownership of at least fifty percent (50%) of the equity interest with the power to direct the management and policies of such non-corporate entities. 1.2 "Confidential Information" means all proprietary materials and information of a Party, whether or not patentable, which are communicated or provided to the other Party pursuant to the terms of this Agreement and marked in writing as confidential, including without limitation, the existence and terms of this Agreement. 1.3 "Control" means, with respect to any (a) material, know-how or other information or (b) intellectual property right, the possession of (whether by ownership or license, other than pursuant to this Agreement), or the ability of a Party or its Affiliates to grant access to, or a license or sublicense of, such item or right as provided for herein without violating the terms of any agreement or other arrangement with any Third Party PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. existing at the time such Party would be required hereunder to grant the other Party such access or license or sublicense. 1.4 "Divestiture Transaction" has the meaning ascribed thereto in Section 3.3(c)(i). 1.5 "Existing Formulation" has the meaning ascribed thereto in Section 3.1(b)(iv). 1.6 "FDA" means the United States Food and Drug Administration, and any successor agency. 1.7 "In Vivo Know-How" means any and all data and results in, from or relating to any in vivo studies of the interaction of metaxalone with enzyme systems or other drugs conducted by or on behalf of either Party or any Affiliate thereof. 1.8 "In Vivo Patent Rights" means (a) any patent application with claims covering In-Vivo Know-How, (b) all corresponding patent applications filed in other jurisdictions, (c) all divisions, continuations and continuations-in-part of such patent applications, (d) all patents issuing thereon and (e) all reissues, reexaminations and extensions of any of the foregoing patents. 1.9 "Last 6 Months" has the meaning ascribed thereto in Section 3.3(b). 1.10 "Last 12 Months" has the meaning ascribed thereto in Section 3.3(a). 1.11 "Last 36 Months" has the meaning ascribed thereto in Section 3.3(b). 1.12 "Licensed Know-How" means (a) all data and results in, from or relating to the in vitro enzyme studies described on Schedule A, including without limitation the data and results in the study reports attached as Schedule A1 and (b) all In Vivo Know-How owned or Controlled by Mutual. 1.13 "Licensed Patent Rights" means (a) the patent application attached as Schedule B to this Agreement, (b) all corresponding patent applications filed in other jurisdictions, (c) all divisions, continuations and continuations-in-part of such patent applications, (d) all patents issuing thereon, (e) all reissues, reexaminations and extensions of any of the foregoing patents and (f) In Vivo Patent Rights owned or Controlled by Mutual. 1.14 "Licensed Products" means any product or kit containing or comprised of the active pharmaceutical ingredient known as metaxalone and any method of making or using the active pharmaceutical ingredient known as metaxalone. 1.15 "Net Sales" means the gross amount invoiced for the sale or other disposition of Licensed Products by Licensee and its Related Parties to non-sublicensee Third Parties, less (a) trade, quantity and early pay cash discounts or rebates which are actually allowed, (b) amounts repaid or credited by reason of returns and rebates, including PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 2 any statutory or contractual liability for rebates to be paid to or for the benefit of any government entity including, but not limited to, rebates to be paid pursuant to the Medicaid rebate legislation and state and local government rebate programs, (c) any adjustments granted to customers for repayments, allowances or credits for rejected or damaged product, retroactive price adjustments (e.g., floorstock adjustments), reprocurement fees, promotional allowances, chargebacks, or other customary discounts, deductions and administrative fees directly related to such product, (d) special handling fees, transportation and charges to the extent included in the invoice price and (e) actual sales, use or excise taxes, tariff or custom duties, and other governmental charges to the extent included in the invoice. 1.16 "Negotiation Period" has the meaning ascribed thereto in Section 3.3(c)(i). 1.17 "New Formulation Licensed Product" has the meaning ascribed thereto in Section 3.1(b)(iv). 1.18 "Offer" has the meaning ascribed thereto in Section 3.3(c)(i). 1.19 "Party" means Mutual or Licensee; "Parties" means Mutual and Licensee. 1.20 "Reduced Royalty Period" has the meaning ascribed thereto in Section 3.3(c)(i). 1.21 "Related Parties" means, with respect to a Party, such Party's Affiliates, and its and its Affiliates' distributors and permitted sublicensees under this Agreement. Related Parties does not include wholesale distributors of Licensee or its Affiliates who purchase Licensed Products from such Party or its Affiliates in an arm's length transaction. 1.22 "Revised Labeling" has the meaning ascribed thereto in Section 2.5. 1.23 "Revised Labeling Patent Claim" has the meaning ascribed thereto in Section 2.5. 1.24 "Third Party" means any person or entity other than Mutual or Licensee or their Affiliates. 1.25 "Valid Claim" means a claim of an issued and unexpired patent within the Licensed Patent Rights, which has not been withdrawn, canceled or terminally disclaimed, or held unpatentable, invalid or unenforceable by a court or other tribunal of competent jurisdiction in a final, non-appealable decision. LICENSE 2.1 Grants. (a) Mutual hereby grants to Licensee and its Affiliates a worldwide, co-exclusive (with Mutual) license under the Licensed Patent Rights and under the Licensed Know-How, in each case to make, use, offer for sale, sell and import Licensed Products. For the avoidance of doubt, the license granted to Licensee herein shall include, PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 3 without limitation, the right to use Licensed Know-How and License Patent Rights in connection with the regulatory approval, labeling and marketing of Licensed Products. (b) Licensee hereby grants to Mutual and its Affiliates a worldwide, non-exclusive license under any and all In Vivo Know-How and In Vivo Patent Rights owned or Controlled by Licensee, solely to make, use, offer for sale, sell and import any products, kits or methods other than Licensed Products. For the avoidance of doubt, the license granted to Mutual herein shall include, without limitation, the right to use In Vivo Know-How and In Vivo Patent Rights in connection with the regulatory approval, labeling and marketing of products other than Licensed Products. In the event Mutual or its Affiliate enters into any agreement with any Third Party granting such Third Party any license, option, covenant not to sue or other rights with respect to such In Vivo Know-How or In Vivo Patent Rights, then Mutual shall pay to Licensee, at Mutual's discretion, (i) [***] percent ([***]%) of [***] received from such Third Party pursuant to such agreement or (ii) [***] percent ([***]%) of [***] received from such Third Party pursuant to such agreement, [***] in connection with generating such In Vivo Know-How and preparing, filing and prosecuting such In-Vivo Patent Rights. In the event Licensee or its Affiliate enters into any agreement with any Third Party granting such Third Party any license, option, covenant not to sue or other rights with respect to In Vivo Know-How or In Vivo Patent Rights in connection with any products, kits or methods other than Licensed Products, expressly excluding any other products currently owned, Controlled or marketed by Licensee or its Affiliates, then Licensee shall pay to Mutual [***] percent ([***]%) of [***] received from such Third Party pursuant to such agreement. 2.2 Retained Rights. Mutual shall retain all other rights, title and interests in and to the Licensed Patent Rights and Licensed Know-How, and agrees that during the term of this Agreement it will not license these rights to any Third Party for use in any Licensed Product. 2.3 Sublicenses. Each Party and its respective Affiliates shall have the right to grant sublicenses under the licenses granted to it by the other Party pursuant to Section 2.1. Such sublicenses shall be subject in all respects to the terms and conditions of this Agreement. 2.4 Diligence. Licensee shall use commercially reasonable efforts and diligence to make, use, offer for sale, sell and import Licensed Products, consistent with reasonable scientific and business practices and judgments in the pharmaceutical industry for products with similar commercial value, market potential and profitability; provided that in no event will Licensee be obligated to continue to market its currently-approved Licensed Product or to bring to market a New Formulation Licensed Product. 2.5 Additional Licensee Obligations. Mutual and Licensee shall cooperate (a) in obtaining or effecting revised labeling for Licensed Products incorporating the Licensed Know-How ("Revised Labeling") and (b) to obtain an issued patent within the Licensed Patent Rights with one or more Valid Claims that cover Revised Labeling; provided, however, that if no Revised Labeling has been obtained, then such Valid Claims shall be substantially the same in scope as at least one of the pending claims in the Licensed Patent PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 4 Rights on the Effective Date, expressly excluding claims numbered [***] ("Revised Labeling Patent Claim"). Licensee shall use best efforts to obtain or effect Revised Labeling in a reasonably prompt manner, and will discuss Revised Labeling with FDA no later than March 31, 2006. FEES AND ROYALTIES 3.1 Fees and Royalties. (a) Licensee shall make a one-time, up-front payment to Mutual of US $35,000,000 upon execution of this Agreement; (b) Licensee shall pay to Mutual earned royalties on Net Sales as follows: (i) a royalty of [***] percent ([***]%) of all Net Sales, as extended payments in consideration for the rights granted under this Agreement to the Licensed Know-How; and (ii) a separate and additional royalty of [***] percent ([***]%) of all Net Sales if the [***], beginning on the [***] of a Licensed Product with [***]; and (iii) a separate and additional royalty of [***] percent ([***]%) of all Net Sales if the [***], beginning on the [***] and continuing for so long as [***]; and (iv) a separate and additional royalty of [***] percent ([***]%) of all Net Sales if the [***] marketed or sold by Licensee, or by any Related Parties to whom Licensee has granted rights or from whom Licensee has received rights for such [***], if such [***] is different from the formulation(s) of Licensed Product approved for marketing by FDA on the Effective Date ("Existing Formulation"), expressly excluding different dosage strengths of the Existing Formulation ("New Formulation Licensed Product"), beginning on the [***] final approval; provided that once the total aggregate royalty payable pursuant to this Section 3.1(b)(iv) equals US $[***], a separate and additional royalty shall be payable under this Section 3.3(b)(iv) only in the event that the total royalties payable pursuant to Section 3.1(b) for any calendar quarter are less than [***] percent ([***]%) of Net Sales, in which case the royalty payable pursuant to this Section 3.1(b)(iv) for such calendar quarter shall be at a rate equal to the difference between [***] percent ([***]%) and the sum of the royalty rates payable pursuant to Section 3.1(b) for such calendar quarter. 3.2 Calculation of Royalties. The obligation to pay royalties to Mutual shall be imposed only once with respect to the same unit of Licensed Product, and subject to adjustment pursuant to Section 3.3 below, the total royalties payable on Net Sales for any calendar quarter shall equal the sum of the applicable royalties set forth in Section 3.1 hereof, applied separately and pro-rated as necessary for Net Sales in such calendar quarter. 3.3 Adjustment of Royalty Obligations; Right of First Offer. PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 5 (a) 12-Month Sales Adjustment. Net Sales shall be calculated at the end of each calendar quarter for the immediately preceding consecutive twelve (12)-month period ("Last 12 Months"). If, based on any such quarterly calculation, aggregate Net Sales are less than $[***] for the Last 12 Months, then, notwithstanding anything to the contrary in this Agreement, the royalties payable for such calendar quarter shall be at a rate of [***] percent ([***]%) of all Net Sales. For the avoidance of doubt, if any quarterly calculation of Net Sales for the Last 12 Months made after the application of the foregoing royalty adjustment is greater than or equal to $[***], then all applicable royalties pursuant to Section 3.1 shall be payable for such calendar quarter. (b) Further Sales Adjustment. Net Sales shall also be calculated at the end of each calendar quarter for the immediately preceding consecutive thirty-six (36)-month period ("Last 36 Months") and the immediately preceding consecutive six (6)-month period ("Last 6 Months"). If, based on any quarterly calculation performed pursuant to Section 3.3(a) or this Section 3.3(b), aggregate Net Sales are less than $[***] for the Last 36 Months or less than $[***] for the Last 6 Months then, notwithstanding anything to the contrary in this Agreement, the royalties payable for such calendar quarter shall be at a rate of [***] percent ([***]%) of all Net Sales. For the avoidance of doubt, if any quarterly calculation of Net Sales for the Last 12 Months made after the application of the foregoing royalty adjustment is greater than or equal to $[***], then all applicable royalties pursuant to Section 3.1 shall be payable for such calendar quarter. (c) Right of First Offer. (i) During any period in which royalty payments are reduced pursuant to Section 3.3(a) or (b) hereof ("Reduced Royalty Period"), neither Licensee nor its Affiliates may enter into a transaction with a Third Party for the license, sublicense, assignment, transfer or sale of all or substantially all of Licensee's and/or its Affiliates' intellectual property rights or any other assets relating to Licensed Products, by merger, sale of assets or otherwise (a "Divestiture Transaction") to such Third Party without first providing Mutual with a written offer ("Offer") to enter into a Divestiture Transaction at the then-current fair market value for such intellectual property or assets. Mutual shall have [***] ([***]) days after receipt of the Offer to notify Licensee in writing of its interest in such Divestiture Transaction. If Mutual notifies Licensee in writing within such [***] ([***]) day period that it is interested in such Divestiture Transaction, then the Parties shall promptly commence good faith negotiations for a period of up to [***] ([***]) months after Mutual's receipt of the Offer and any mutually agreed extension of such period ("Negotiation Period") in an effort to reach a mutually acceptable definitive agreement for such Divestiture Transaction. Licensee shall not, during the Negotiation Period, solicit, offer, negotiate or enter into with any Third Party any agreement, contract or understanding with respect to a Divestiture Transaction or that would otherwise be inconsistent with Mutual's rights hereunder. (ii) If (x) Mutual notifies Licensee in writing that it is not interested in such Divestiture Transaction or does not notify Licensee in writing within such [***] ([***]) day period that it is interested in such Divestiture Transaction, or (y) despite each Party's good faith efforts, Mutual and Licensee are not able to reach agreement on and PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 6 execute a definitive agreement within the Negotiation Period, then, upon expiration of the [***] ([***]) day period or the Negotiation Period, as applicable, (A) no royalties shall be payable to Mutual under this Agreement for any calendar quarter(s) that is part of the Reduced Royalty Period and (B) Licensee may negotiate and enter into a Divestiture Transaction with any Third Party; provided, however, that if this Agreement is sublicensed or assigned to such Third Party in the Divestiture Transaction, such Third Party shall be required to assume the obligations of Licensee under this Agreement, to the extent not retained by Licensee (except that the provisions of this Section 3.3 shall no longer apply), and further provided that Licensee shall be required to include a sublicense or assignment of this Agreement in the Divestiture Transaction if, prior to the effective date of the definitive agreement for the Divestiture Transaction, Revised Labeling has been obtained, a Revised Labeling Patent Claim has issued and continues to be a Valid Claim, or a New Formulation Licensed Product has been granted final marketing approval by the FDA; and provided further, that, during the Reduced Royalty Period, Licensee and its Affiliates may not enter into a Divestiture Transaction with a Third Party on terms and conditions that, on the whole, are materially more favorable to such Third Party than those previously offered to Mutual pursuant to this Section 3.3(c) without first offering a Divestiture Transaction to Mutual on the same or substantially similar terms and conditions pursuant to the procedures set forth in Section 3.3(c)(i) above. 3.4 Third Party Royalty Reduction. If Licensee or any Related Party thereof is reasonably required to enter into an agreement(s) with any Third Party(ies) in order to obtain rights to enable the use of the Licensed Know-How or the Licensed Patent Rights in the labeling of Licensed Products to avoid infringing or misappropriating the intellectual property rights of such Third Party(ies), then, notwithstanding anything to the contrary in this Agreement, Licensee and its Related Parties shall be entitled to a credit against any future royalties payable to Mutual hereunder in an amount equal to [***] percent ([***]%) of the amount of such royalties paid by Licensee and its Related Parties to such Third Parties to obtain such rights, provided that the credit for any given calendar quarter will not exceed the total royalties payable to Mutual for such calendar quarter, and provided further that any royalties not so credited by reason of the foregoing proviso may be carried forward for credit against royalties payable to Mutual in any future calendar quarter. 3.5 Reports and Payments. Within [***] ([***]) days after the end of each calendar quarter, Licensee shall deliver to Mutual (a) a written report showing its computation of royalties due for such quarter on a country-by-country and product-by-product basis and (b) payment of the royalties due for such calendar quarter. With respect to sales of Licensed Products sold for United States Dollars, the sales and royalties payable shall be expressed in United States Dollars. With respect to sales of Licensed Products sold for a currency other than United States Dollars, the sales and royalties payable shall be expressed in their United States Dollar equivalent calculated using the applicable conversion rates for buying United States Dollars published by The Wall Street Journal on the last business day of the calendar quarter to which the royalty report relates. All royalty payments shall be made in United States Dollars and shall be paid by bank wire transfer in immediately available funds to the following bank account: Beneficiary Bank: [***] PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 7 ABA# [***] Account # to credit: [***] 3.6 Tax Withholding. If Licensee determines in good faith that tax withholdings under the laws of any country are required with respect to payments to Mutual, Licensee shall withhold the required amount and pay it to the appropriate governmental authority. In any such case, Licensee shall promptly provide Mutual with original receipts or other evidence reasonably desirable and sufficient to allow Mutual to document such tax withholdings for purposes of claiming foreign tax credits and similar benefits, and the Parties will cooperate to reduce or remove the application of such withholding requirements to the extent reasonably possible and at no cost to Licensee. 3.7 Records. Licensee shall keep, and shall require all Related Parties to keep, true and accurate books of accounts and other records containing all information and data which may be necessary to ascertain and verify the royalties payable under this Agreement. During the term of this Agreement and for a period of [***] ([***]) years following its termination, Mutual shall have the right from time to time (not to exceed once during each calendar year) to have an independent certified public accountant inspect such books and records of Licensee and its Affiliates for the immediately preceding [***] ([***]) year period. Any such independent certified accountant must be reasonably acceptable to Licensee, and shall execute a standard form of confidentiality agreement with Licensee, and shall be permitted to share with Mutual solely its findings with respect to the accuracy of the royalties reported as payable under this Agreement. INTELLECTUAL PROPERTY 4.1 Patent Prosecution. Mutual shall have the right, [***], to prepare, file, prosecute and maintain the Licensed Patent Rights. Mutual shall keep Licensee promptly informed with respect to same, and shall from time to time, or at Licensee's reasonable request, consult with Licensee regarding the status of such activities and shall provide Licensee, at Mutual's request, with copies of all documents filed in connection with, and all written communications relating to, same. In the event that Mutual determines not to prepare, file, prosecute or maintain any patent application or patent within the Licensed Patent Rights, Mutual shall promptly notify Licensee, and thereupon, Licensee shall have the right, [***], to prepare, file, prosecute and maintain any such patent application or patent. 4.2 Infringement. (a) Each Party shall promptly report in writing to the other Party during the term of this Agreement any suspected infringement of the Licensed Patent Rights or In Vivo Patent Rights licensed to Mutual and its Affiliates pursuant to Section 2.1(b) and any suspected unauthorized use or misappropriation of any Licensed Know-How, In Vivo PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 8 Know-How licensed to Mutual and its Affiliates pursuant to Section 2.1(b) or Confidential Information of which it becomes aware, and shall provide the other Party with all available evidence supporting such suspected infringement or unauthorized use or misappropriation. (b) Except as provided in Section 4.2(d) of this Agreement, Licensee shall have the right to initiate an appropriate suit anywhere in the world against any Third Party who at any time is suspected of infringing all or any portion of the Licensed Patent Rights or using without proper authorization all or any portion of the Licensed Know-How by virtue of the making, using, offering for sale, selling or importing of any Licensed Product. Licensee shall give Mutual reasonable advance notice of its intent to file such suit and the reasons therefor. Further, Licensee shall keep Mutual promptly informed, and shall from time to time consult with Mutual regarding the status of any such suit and shall provide Mutual with copies of all documents filed in, and all written communications relating to, such suit. (c) Licensee shall have the [***] right to select counsel for any suit referred to in Section 4.2(b) of this Agreement and shall pay [***] of the suit, including without limitation [***]. If necessary, Mutual shall join as a party to the suit but shall be under no obligation to participate except to the extent that such participation is required as the result of being a named party to the suit. Mutual shall offer reasonable assistance to Licensee in connection therewith [***] to Licensee except for [***]. [***], Licensee shall provide counsel for Mutual and pay for [***], unless Mutual elects to be represented in any such suit by its own counsel, which shall be [***]. Licensee shall not settle any such suit involving rights of Mutual without obtaining the prior written consent of Mutual, which consent shall not be unreasonably withheld. (d) In the event that Licensee elects not to initiate an infringement or other appropriate suit pursuant to Section 4.2(b) of this Agreement, Licensee shall promptly advise Mutual of its intent not to initiate such suit, and Mutual shall have the right, [***], to initiate an appropriate suit anywhere in the world against any Third Party who at any time is suspected of infringing all or any portion of the Licensed Patent Rights or using without proper authorization all or any portion of the Licensed Know-How. Mutual shall give Licensee reasonable advance notice of its intent to file such suit and the reasons therefor, and shall provide Licensee with an opportunity to make suggestions and comments regarding such suit. Further, Mutual shall keep Licensee promptly informed, and shall from time to time consult with Licensee regarding the status of any such suit and shall provide Licensee with copies of all documents filed in, and all written communications relating to, such suit. (e) In exercising its rights pursuant to Section 4.2(d) of this Agreement, Mutual shall have [***] right to select counsel and shall pay [***] including without limitation [***]. If necessary, Licensee shall join as a party to the suit but shall be under no obligation to participate except to the extent that such participation is required as a result of being a named party to the suit. At Mutual's request, Licensee shall offer reasonable assistance to Mutual in connection therewith [***] to Mutual except for [***]. At Mutual's expense, Mutual shall provide counsel for Licensee and pay for [***], unless Licensee elects to be represented in any such suit by its own counsel, which shall be [***]. PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 9 Mutual shall not settle any such suit involving rights of Licensee without obtaining the prior written consent of Licensee, which consent shall not be unreasonably withheld, it being understood and agreed that Licensee shall have the sole right to settle any such suit to the extent such settlement includes a license or sublicense of any rights under the Licensed Patent Rights or the Licensed Know-How. (f) Any damages, royalties, license fees or other compensation (including any amount received in settlement of such litigation) received in connection with a suit under this Section 4.2 shall be allocated first to [***]including [***]; and (i) if Licensee has initiated the suit, then any of the remaining amount [***] and the balance being retained by Licensee or (ii) if Mutual has initiated the suit, [***] with the balance being retained by Mutual. (g) As between Mutual and Licensee, Mutual shall have [***] to initiate an appropriate suit anywhere in the world against any Third Party who at any time is suspected of infringing all or any portion of the Licensed Patent Rights or using without proper authorization all or any portion of the Licensed Know-How by virtue of the making, using, offering for sale, selling or importing of any product that is not a Licensed Product. If Mutual or any Third Party permitted to do so by Mutual initiates such a suit under this Section 4.2(g) with respect to products other than Licensed Products, Mutual shall keep Licensee promptly informed, and shall from time to time consult with Licensee regarding the status of such suit and shall provide Licensee with copies of all documents filed in, and all written communications relating to, such suit to the extent any of the foregoing are reasonably related to the ownership, inventorship, validity, enforceability or interpretation of any claims of any of the Licensed Patent Rights that also cover Licensed Products or any portion of the Licensed Know-How that also relate to Licensed Products, so as to enable Licensee and its Related Parties to preserve the commercial value of the Licensed Patent Rights and the Licensed Know-How to the extent reasonably possible with respect to Licensed Products. (h) As between Mutual and Licensee, Mutual shall have [***] to initiate an appropriate suit anywhere in the world against any Third Party who at any time is suspected of infringing all or any portion of the In Vivo Patent Rights licensed by Licensee to Mutual and its Affiliates pursuant to Section 2.1(b) or using without proper authorization all or any portion of the In Vivo Know-How licensed by Licensee to Mutual and its Affiliates pursuant to Section 2.1(b) by virtue of the making, using, offering for sale, selling or importing of any product that is neither a Licensed Product nor any other product currently owned, Controlled or marketed by Licensee or its Affiliates. Mutual shall give Licensee reasonable advance notice of its intent to file such suit and the reasons therefor. Further, Mutual shall keep Licensee promptly informed, and shall from time to time consult with Licensee regarding the status of any such suit and shall provide Licensee with copies of all documents filed in, and all written communications relating to, such suit. Licensee shall have the [***] to select counsel for any such suit and shall [***], including without limitation [***]. If necessary, Licensee shall join as a party to such suit, but shall be under no obligation to participate except to the extent that such participation is required as the result of being a named party to such suit. Licensee shall offer reasonable assistance to Mutual in connection therewith [***] to Mutual [***]. [***], Mutual shall provide PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 10 counsel for Licensee and pay for [***] unless Licensee elects to be represented in any such suit by its own counsel, [***]. Mutual shall not settle any such suit involving rights of Licensee without obtaining the prior written consent of Licensee, which consent shall not be unreasonably withheld. CONFIDENTIAL INFORMATION 5.1 Treatment of Confidential Information. Each Party shall maintain in confidence the Confidential Information of the other Party and shall not disclose, divulge or otherwise communicate such Confidential Information to others, or use it for any purpose, except pursuant to, and in order to carry out, the terms and objectives of this Agreement. Each Party may disclose Confidential Information of the other Party to its Affiliates, and to its and their directors, employees, consultants, subcontractors, sublicensees, agents and investors, in each case who have a specific need to know such Confidential Information and who are bound by a like obligation of confidentiality and restriction on use. 5.2 Release from Restrictions. The provisions of Section 5.1 of this Agreement shall not apply to any Confidential Information disclosed hereunder which: (a) was known or used by the receiving Party or any of its Affiliates prior to its date of disclosure to the receiving Party, as demonstrated by competent evidence of the receiving Party or any of its Affiliates; (b) either before or after the date of the disclosure to the receiving Party is lawfully disclosed to the receiving Party or any of its Affiliates by an independent, unaffiliated Third Party rightfully in possession of the Confidential Information; (c) either before or after the date of the disclosure to the receiving Party becomes published or generally known to the public through no fault or omission on the part of the receiving Party or its Affiliates; (d) is required to be disclosed by the receiving Party to comply with applicable laws or regulations, to defend or prosecute litigation, to file for patent protection, or to file for regulatory approval to test or market Licensed Products; provided, however, that, where available, the receiving Party takes reasonable and lawful actions to avoid and/or minimize the degree of such disclosure; or (e) is independently developed by the receiving Party or any of its Affiliates without reference to the Confidential Information of the disclosing Party. TERMINATION 6.1 Term. This Agreement shall commence on the Effective Date and unless terminated earlier in accordance with Section 6.2 of this Agreement, shall continue until the later of (a) the expiration of the last to expire of the Licensed Patent Rights and (b) twenty (20) years after the filing date of the patent application set forth on Schedule 1.12. PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 11 6.2 Termination For Breach. Without limiting any other legal or equitable remedies that a Party may have, each Party shall be entitled to terminate this Agreement by written notice to the other Party in the event that the other Party shall be in default of any of its material obligations hereunder and shall fail to remedy any such default within [***] ([***]) days after written notice thereof by the non-breaching Party ("Cure Period"). Notwithstanding the foregoing, in the event Licensee's termination under this Section 6.2 for an uncured material breach by Mutual would be effective after an FDA grant of approval for Revised Labeling, then Licensee may elect, in its sole discretion and in lieu of its termination right and without limiting any other legal or equitable remedies that it may have, to reduce the royalties payable to Mutual under this Agreement by [***] percent ([***]%) commencing on the expiration of the applicable Cure Period. 6.3 Consequences of Termination. Upon any termination of this Agreement, neither Party shall be relieved of any obligations incurred prior to such termination, it being understood and agreed that Licensee shall have no royalty obligations hereunder with respect to the Net Sales made after the effective date of any termination of this Agreement. Except as provided herein, upon the termination of this Agreement (a) by Mutual for the material breach of Licensee, unless the termination arises out of the action or inaction of the relevant sublicensee, or (b) by mutual agreement of Mutual and Licensee, all sublicenses granted by Licensee and its Affiliates under this Agreement shall continue in full force and effect as licenses directly with Mutual; provided, that Licensee's and its Affiliates' sublicensees agree in writing to assume the obligations of Licensee and its Affiliates' hereunder and Mutual shall have no obligation under any such sublicense except to maintain the continued effectiveness of the sublicense. 6.4 Disposition of Licensed Products. Upon any termination of this Agreement, Licensee shall, within [***] ([***]) days of the effective date of such termination, notify Mutual in writing of the amount of Licensed Products which Licensee and its Related Parties then have completed on hand, the sale of which would, but for the termination, be subject to royalty payments, and Licensee and its Related Parties shall thereupon be permitted during the [***] ([***]) months following such termination to sell that amount of Licensed Products; provided, however, that Licensee shall pay the aggregate royalty due thereon at the conclusion of the earlier of [***] ([***]) days after the last such sale or [***] ([***]) days after the end of such [***] ([***])-month period. 6.5 Survival of Obligations; Return of Confidential Information. Notwithstanding the expiration or any termination of this Agreement, the obligations of the Parties under Sections 3.6, 4.2 (a) through (e) (in the event of expiration of this Agreement or in the event of termination of this Agreement but only with respect to litigation initiated prior to the effective date of such termination), 4.2(f), 6.3, 6.4, 6.5, 7.3, 7.4, 7.5, 7.6(a), 7.7, 7.8, 7.9, 7.10, 7.11, 7.12, 7.13, 7.15 and Article V shall survive and continue to be enforceable. Furthermore, Section 2.1(b) shall survive any termination of this Agreement by Mutual for a material breach by Licensee. Upon any termination of this Agreement, each Party shall promptly return to the other Party all tangible Confidential Information of the other Party. PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 12 MISCELLANEOUS 7.1 Representations and Warranties. (a) Representations and Warranties of the Parties. Each Party hereby represents and warrants to the other Party that (i) it is duly organized and validly existing under the laws of its jurisdiction of incorporation or formation, and has full corporate or other power and authority to enter into this Agreement and to carry out the provisions hereof; (ii) it is duly authorized to execute and deliver this Agreement and to perform its obligations hereunder, and the person or persons executing this Agreement on its behalf has been duly authorized to do so by all requisite corporate action; and (iii) this Agreement is legally binding upon it and enforceable in accordance with its terms. (b) Representations and Warranties of Mutual. Mutual hereby represents and warrants to Licensee that as of the Effective Date (i) it has full power and authority to grant the licenses set forth in this Agreement; (ii) Mutual owns all right, title and interest in and to the Licensed Patent Rights and the Licensed Know-How, free and clear of any encumbrances, liens, charges, adverse claims, pledges, assignments, licenses, and covenants by Mutual not to sue any Third Party; (iii) all patent applications within the Licensed Patent Rights have been duly prepared, filed, prosecuted and maintained in accordance with all applicable laws, rules and regulations; (iv) no government funding has been obtained or used in connection with the research and development of any Licensed Know-How or the subject matter disclosed in any of the Licensed Patent Rights, including without limitation pursuant to any grants from the National Institutes of Health; (v) the Licensed Know-How and Licensed Patent Rights include all of the intellectual property owned or Controlled by Mutual specifically relating to the labeling of Licensed Products in accordance with the Licensed Know-How and Licensed Patent Rights; and (vi) to the knowledge of Mutual, without having made any special inquiry in connection with the execution of this Agreement, the use of Licensed Know-How or the Licensed Patent Rights in the labeling of Licensed Products would not infringe or misappropriate the intellectual property rights of any Third Party in the United States. 7.2 Disclaimer. EXCEPT AS MAY BE EXPRESSLY SET FORTH HEREIN, MUTUAL MAKES NO REPRESENTATIONS OR WARRANTIES OF ANY KIND CONCERNING THE LICENSED PATENT RIGHTS, LICENSED PRODUCTS AND THE RIGHTS GRANTED HEREUNDER, INCLUDING, WITHOUT LIMITATION, WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NONINFRINGEMENT, VALIDITY OF PATENT RIGHTS, OR THE ABSENCE OF LATENT OR OTHER DEFECTS, WHETHER OR NOT DISCOVERABLE, AND HEREBY DISCLAIMS THE SAME. SPECIFICALLY, AND NOT TO LIMIT THE FOREGOING, EXCEPT AS EXPRESSLY SET FORTH HEREIN, MUTUAL MAKES NO WARRANTY OR REPRESENTATION (A) REGARDING THE VALIDITY OR SCOPE OF ANY OF THE CLAIM(S), WHETHER ISSUED OR PENDING, OF ANY OF THE LICENSED PATENT RIGHTS, AND (B) THAT THE EXPLOITATION OF THE LICENSED PATENT RIGHTS OR ANY LICENSED PRODUCT WILL NOT INFRINGE ANY PATENTS OR OTHER INTELLECTUAL PROPERTY RIGHTS OF ANY THIRD PARTY. PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 13 7.3 Indemnification and Liability Limitation. (a) Licensee agrees to defend Mutual, its agents, directors, officers and employees, at Licensee's sole expense, and will indemnify and hold harmless Mutual, its agents, directors, officers and employees, from and against any and all losses, costs, damages, fees or expenses arising out of or in connection with (i) Licensee's or any of its Related Parties' manufacture, use or sale of any Licensed Product, including, but not limited to, any actual or alleged injury, damage, death or other consequence occurring to any person as a result, directly or indirectly, of the possession, use or consumption of any Licensed Product, whether claimed by reason of breach of warranty, negligence, product defect or otherwise, and regardless of the form in which any such claim is made or (ii) any breach of the representations, warranties or covenants made by Licensee hereunder, except, in each case, to the extent attributable to negligence or willful misconduct by or on behalf of Mutual. In the event of any such claim against Mutual or any agent, director, officer or employee, Mutual shall promptly notify Licensee in writing of the claim and Licensee shall manage and control, at its sole expense, the defense of the claim and its settlement. Mutual shall cooperate with Licensee and may, at its option and expense, be represented in any such action or proceeding. (b) Mutual agrees to defend Licensee, its agents, directors, officers and employees, at Mutual's sole expense, and will indemnify and hold harmless Licensee, its agents, directors, officers and employees, from and against any and all losses, costs, damages, fees or expenses arising out of or in connection with (i) Mutual or any of its Related Parties' manufacture, use or sale of any Licensed Product, including, but not limited to, any actual or alleged injury, damage, death or other consequence occurring to any person as a result, directly or indirectly, of the possession, use or consumption of any Licensed Product, whether claimed by reason of breach of warranty, negligence, product defect or otherwise, and regardless of the form in which any such claim is made or (ii) any breach of the representations, warranties or covenants made by Mutual hereunder, except, in each case, to the extent attributable to negligence or willful misconduct by or on behalf of Licensee. In the event of any such claim against Licensee, or any agent, director, officer or employee, Licensee shall promptly notify Mutual in writing of the claim and Mutual shall manage and control, at its sole expense, the defense of the claim and its settlement. Licensee shall cooperate with Mutual and may, at its option and expense, be represented in any such action or proceeding. (c) NOTWITHSTANDING ANYTHING IN THIS AGREEMENT TO THE CONTRARY, IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR ANY SPECIAL, INCIDENTAL, CONSEQUENTIAL OR INDIRECT DAMAGES ARISING OUT OF THIS AGREEMENT, HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY. THIS LIMITATION SHALL APPLY EVEN IF THE PARTIES HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGE; PROVIDED, HOWEVER, THAT THIS LIMITATION SHALL NOT APPLY TO DAMAGES RESULTING FROM BREACHES BY A PARTY OF ITS DUTY OF CONFIDENTIALITY AND NON-USE IMPOSED UNDER ARTICLE V OR TO THE PARTIES' INDEMNITY OBLIGATIONS UNDER THIS AGREEMENT. 7.4 Treatment Upon Bankruptcy. PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 14 (a) Assumption and Assignment of Agreement. (i) Notwithstanding any other provision of this Agreement, each Party hereby consents to the assumption of this Agreement by the other Party (the "Debtor Party") in any case commenced by or against the Debtor Party under Title 11 of the United States Code, as amended (the "Bankruptcy Code") to the extent that such consent is required under Section 365(c)(1) of the Bankruptcy Code, but only if the Debtor Party is otherwise entitled to assume this Agreement under the applicable requirements of the Bankruptcy Code. The sole purpose of the foregoing consent is to overcome any restriction potentially imposed by Section 365(c)(1) of the Bankruptcy Code on the Debtor Party's assumption of this Agreement in a bankruptcy case concerning the Debtor Party. It is not intended to limit any other rights of the Party that is not the Debtor Party (the "Non-Debtor Party") under this Agreement or any provision of the Bankruptcy Code, including Section 365(c)(1). The foregoing consent applies only to the assumption of this Agreement by the Debtor Party and does not apply to the Debtor Party's assignment of this Agreement or any rights hereunder to a Third Party. (ii) Notwithstanding any other provision of this Agreement, the Non-Debtor Party hereby consents to the assignment of this Agreement by the Debtor Party to a Third Party solely in connection with a sale of all or substantially all of the Debtor Party's business or assets relating to this Agreement to such Third Party, pursuant to an orderly sale process under Section 363 of the Bankruptcy Code or a confirmed plan under Section 1129 of the Bankruptcy Code, that contemplates the continued operation of the purchased business or assets; provided that such Third Party promptly agrees in writing to be bound by the terms and conditions of this Agreement and the Debtor Party is otherwise entitled to assign this Agreement under the applicable requirements of the Bankruptcy Code. The sole purpose of the foregoing consent is to overcome any restriction potentially imposed by Section 365(c)(1) of the Bankruptcy Code on the Debtor Party's assignment of this Agreement under the specific circumstances described in this Section 7.4(a)(ii). It is not intended to limit any other rights of the Non-Debtor Party under this Agreement or any provision of the Bankruptcy Code, including Section 365(c)(1), or to apply to the assignment of this Agreement in any other context. (iii) Notwithstanding any other provision of this Agreement, but subject to subsection (ii) above, the Debtor Party may only assign this Agreement to a Third Party in any case commenced by or against it under the Bankruptcy Code with the prior written consent of the Non-Debtor Party. (b) Intellectual Property Rights. This Agreement and all rights related to and licenses of intellectual property granted under this Agreement by one Party to the other Party are, and shall otherwise be deemed to be, for purposes of Section 365(n) of the Bankruptcy Code, licenses of rights to "intellectual property" as defined under Section 101(35A) of the Bankruptcy Code. In addition to any other rights, elections and remedies under this Agreement, any related agreements, the Bankruptcy Code, or any other applicable law, upon a written request under Section 365(n) of the Bankruptcy Code, the Non-Debtor Party shall be entitled to complete access to any intellectual property of the Debtor Party pertaining to the rights granted in the licenses under this Agreement, all PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 15 embodiments of such intellectual property and all documents, material, data, records, analyses, and information related thereto (including all clinical data, INDs, NDAs, regulatory approvals, regulatory filings, and all other documentation reasonably useful in respect of Licensed Products). (c) Rejection in Bankruptcy. Any rejection of this Agreement by the Debtor Party pursuant to Section 365 of the Bankruptcy Code shall constitute a material breach of this Agreement not subject to notice or cure and, at the election of the Non-Debtor Party, shall cause an immediate and automatic termination of this Agreement. Upon any such rejection, all rights, elections and remedies of the Non-Debtor Party to this Agreement (including under Section 365 of the Bankruptcy Code) are expressly reserved. Further, upon any such rejection, the Parties intend and agree that the Non-Debtor Party may elect to retain its rights under this Agreement pursuant to Section 365(n) of the Bankruptcy Code and that such election shall, among other things, entitle the Non-Debtor Party to invoke and exercise all of its rights to any intellectual property under this Agreement and any other related agreements. 7.5 Publicity. To the extent required by applicable law, Licensee shall include in its regulatory filings a description of the terms of this Agreement. To the extent practicable, Licensee shall provide Mutual with a copy of any such proposed description of the terms of this Agreement before including same in any regulatory filing, and shall consider in good faith Mutual's comments with respect thereto. If required to file this Agreement by applicable law, Licensee shall consult with Mutual in advance of such filing and shall use reasonable efforts to obtain confidential treatment of its terms, to the extent reasonably possible. Except as set forth above, neither Party shall have the right to originate any publicity, news release or other public announcement, written or oral, relating to this Agreement or the existence of an arrangement between the Parties, without the prior written approval of the other Party except as otherwise required by law. 7.6 Assignment; Assumption. (a) Except as set forth in Section 7.4 hereof, and subject to Mutual's right of first offer pursuant to Section 3.3(c), neither this Agreement nor any of the rights or obligations hereunder may be assigned by either Party without the prior written consent of the other Party, not to be unreasonably withheld, except to an Affiliate or to a person or entity who acquires all or substantially all of the business of the assigning Party to which this Agreement relates, by merger, sale of assets or otherwise, or to one or more financial institutions providing financing to such Party, pursuant to the terms of the relevant security agreement. (b) If this Agreement is sublicensed or assigned to any Third Party in connection with a Divestiture Transaction, such Third Party shall be required to assume the obligations of Licensee under this Agreement. Furthermore, Licensee shall be required to include a sublicense or assignment of this Agreement in any Divestiture Transaction if, prior to the effective date of the definitive agreement for the Divestiture Transaction, Revised Labeling has been obtained, a Revised Labeling Patent Claim has issued and continues to be a Valid Claim, or a New Formulation Licensed Product has been granted final marketing approval by the FDA. PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 16 7.7 Governing Law. This Agreement shall be governed by and interpreted in accordance with the laws of the State of New York, without regard to any rule or choice of law principle of New York that would dictate the application of the law of another jurisdiction. 7.8 Waiver. The waiver by either Party of a breach or a default of any provision of this Agreement by the other Party shall not be construed as a waiver of any succeeding breach of the same or any other provision, nor shall any delay or omission on the part of either Party to exercise or avail itself of any right, power or privilege that it has or may have hereunder operate as a waiver of any right, power or privilege by such Party. 7.9 Notices. All notices which are required or permitted hereunder shall be in writing and sufficient if delivered personally, sent by facsimile (effective on the date sent) (and promptly confirmed by personal delivery, registered or certified mail or overnight courier), sent by nationally-recognized overnight courier (effective two (2) business days after sent) or sent by registered or certified mail, postage prepaid, return receipt requested (effective when delivered, per return receipt), addressed as follows: If to Licensee, at: King Pharmaceuticals, Inc. 501 Fifth Street Bristol, TN 376120 Attention: General Counsel Telephone: _______________ Fax: _____________________ If to Mutual at: Mutual Pharmaceutical Company, Inc. 1100 Orthodox Street Philadelphia, PA 19124 Attention: President Telephone: (215) 807-1007 Fax: (215) 744-1929 With a copy to: Mutual Pharmaceutical Company, Inc. 1100 Orthodox Street Philadelphia, PA 19124 Attention: Legal Department Telephone: (215) 697-1710 Fax: (215) 288-6559 ; or to such other address(es) and telecopier numbers as may from time to time be notified by either Party to the other hereunder. PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 17 7.10 No Agency. Nothing herein shall be deemed to constitute either Party as the agent or representative of the other Party or both Parties as joint venturers or partners for any purpose. Neither Party shall be responsible for the acts or omissions of the other Party, and neither Party will have authority to speak for, represent or obligate the other Party in any way without prior written authority from the other Party. 7.11 Entire Agreement. This Agreement contains the full understanding of the Parties with respect to the subject matter hereof and supersedes all prior understandings and writings relating thereto. No waiver, alteration or modification of any of the provisions hereof shall be binding unless made in writing and signed by the Parties by their respective officers thereunto duly authorized. 7.12 Severability. In the event that any provision of this Agreement is held by a court of competent jurisdiction to be unenforceable because it is invalid or in conflict with any law or any relevant jurisdiction, the validity of the remaining provisions shall not be affected, and the rights and obligations of the Parties shall be construed and enforced as if the Agreement did not contain the particular provisions held to be unenforceable. 7.13 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the Parties hereto and their permitted successors and assigns pursuant to Section 7.6. 7.14 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 7.15 Reporting to U.S. Government Agencies. The Parties shall report this Agreement to the United States Federal Trade Commission and the United States Department of Justice, Antitrust Division, pursuant to Section 1112 of Title XI of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 and shall cooperate in responding to any requests from such government agencies. PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 18 IN WITNESS WHEREOF, the Parties hereto have caused this License Agreement to be executed as a sealed instrument in their names by their properly and duly authorized officers or representatives as of the date first above written. MUTUAL PHARMACEUTICAL COMPANY, INC. By: /s/ Richard H. Roberts ------------------------------------ Name: Richard H. Roberts, M.D., Ph.D. Title: Chief Executive Officer and President KING PHARMACEUTICALS, INC. By: /s/ Brian Markison ------------------------------------ Name: Brian Markison Title: President and Chief Executive Officer PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. 19 Schedule A Licensed Know-How In Vitro Enzyme Studies 1. [***] 2. [***] 1. [***] PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. Schedule A1 Study Reports See Attached PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. Schedule B Licensed Patent Rights See Attached PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO THE COMPANY'S APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934. EX-10.38 7 g99351exv10w38.txt EX-10.38 JOHN A.A.BELLAMY SEVERANCE LETTER Exhibit 10.38 [King Pharmaceuticals, Inc. Letterhead] Dear John: Enclosed are two (2) original copies of the Company's Severance Pay Plan Tier I (with Exhibits) for your review. Effective November 1, 2005, you are eligible to receive the following: 1. A lump sum in the total amount of SEVEN HUNDRED EIGHT THOUSAND SEVEN HUNDRED FIFTY DOLLARS ($708,750.00), which represents the following: (1) severance pay for one and one-half years of your annual salary ($315,000.00) in the amount of Four Hundred Seventy-Two Thousand Five Hundred Dollars ($472,500.00), less applicable withholding tax; and (2) one and one-half times your target bonus (50% of your annual salary) in the amount of Two Hundred Thirty-Six Thousand Two Hundred Fifty Dollars ($236,250.00), less applicable withholding tax. 2. Continued health insurance coverage by the Company until May 30, 2007. Please note that BOTH COPIES of EXHIBIT 2 MUST BE COMPLETED AND EXECUTED WITHIN 45 DAYS AFTER THE EFFECTIVE DATE OF YOUR QUALIFIED SEPARATION (see Section 7 of the Severance Pay Plan). Upon completion, please return BOTH COPIES of the Severance Pay Plan (with all Exhibits) to the following address: Gregory A. King King Pharmaceuticals, Inc. 501 Fifth Street Bristol, TN 37620 You have the right to revoke and nullify the agreement within seven (7) days of the date of your signature (see Paragraph 15 of Exhibit 2); therefore, your agreement will not become effective or enforceable until the expiration of the 7-day period. If you do not revoke the Agreement within this timeframe, the Company will begin processing your severance payment. Upon receipt of the severance check from Payroll, the Company will forward to you an original copy of the complete Severance Pay Plan (with Exhibits) and the severance check. Regarding stock options, the Company will allow you to exercise your outstanding stock options. If you do not revoke or nullify the agreement within (7) days of the date of your signature on the agreement, all such options shall be vested after the expiration of the 7-day period and shall be exercisable in accordance with the provisions of your Option Agreements and the Company's Stock Option Plans under which the options were granted (collectively, the "Option Agreements"), the terms of which are incorporated herein by reference. Notwithstanding any provisions to the contrary in the Option Agreements and pursuant to the Company's Severance Policy, you shall have the John A.A. Bellamy October 14, 2005 Page 2 right to exercise any and all such options within three (3) months from the effective date of separation. Any and all such options that are not exercised prior to such time shall expire and be null and void. You shall not be eligible for, and shall not receive, any stock option grants after the effective date of your separation, November 1, 2005. If you have any questions, please feel free to contact me at (423) 274-8639. Sincerely, /s/ Kurt J. Pomrenke Kurt J. Pomrenke Vice President, Legal Affairs Litigation/Labor & Employment Enclosure: Severance Pay Plan (with Exhibits) (2 originals) EX-21.1 8 g99351exv21w1.txt EX-21.1 LIST OF SUBSIDIARIES . . . EXHIBIT 21.1

EX-23.1 9 g99351exv23w1.txt EX-23.1 CONSENT OF PRICEWATERHOUSECOOPERS LLP Exhibit 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-70203, 333-73053 and 333-45276) and in the Registration Statement on Form S-3 (No. 333-82126) of King Pharmaceuticals, Inc. of our report dated February 27, 2006 relating to the financial statements, financial statement schedules, management's assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting, which appears in this Form 10-K. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Raleigh, NC March 3, 2006 EX-31.1 10 g99351exv31w1.txt EX-31.1 SECTION 302 CERTIFICATION OF THE CEO EXHIBIT 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Brian A. Markison, certify that: 1. I have reviewed this annual report on Form 10-K of King Pharmaceuticals, Inc. ("King"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of King as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and (d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ BRIAN A. MARKISON -------------------------------------- Brian A. Markison President and Chief Executive Officer Date: March 3, 2006 EX-31.2 11 g99351exv31w2.txt EX-31.2 SECTION 302 CERTIFICATION OF THE CFO EXHIBIT 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Joseph Squicciarino, certify that: 1. I have reviewed this annual report on Form 10-K of King Pharmaceuticals, Inc. ("King"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of King as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and (d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ JOSEPH SQUICCIARINO -------------------------------------- Joseph Squicciarino Chief Financial Officer Date: March 3, 2006 EX-32.1 12 g99351exv32w1.txt EX-32.1 SECTION 906 CERTIFICATION OF THE CEO EXHIBIT 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with this annual report on Form 10-K of King Pharmaceuticals, Inc. I, Brian A. Markison, Chief Executive Officer of King Pharmaceuticals, Inc., certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in this report fairly presents, in all material respects, the financial condition and results of operations of King Pharmaceuticals, Inc. /s/ BRIAN A. MARKISON -------------------------------------- Brian A. Markison President and Chief Executive Officer Date: March 3, 2006 EX-32.2 13 g99351exv32w2.txt EX-32.2 SECTION 906 CERTIFICATION OF THE CFO EXHIBIT 32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with this annual report on Form 10-K of King Pharmaceuticals, Inc. I, Joseph Squicciarino, Chief Financial Officer of King Pharmaceuticals, Inc., certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in this report fairly presents, in all material respects, the financial condition and results of operations of King Pharmaceuticals, Inc. /s/ JOSEPH SQUICCIARINO -------------------------------------- Joseph Squicciarino Chief Financial Officer Date: March 3, 2006 -----END PRIVACY-ENHANCED MESSAGE-----


Tennessee		54-1684963
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

501 Fifth Street Bristol, Tennessee (Address of Principal Executive Offices)		37620 (Zip Code)


(Title of each class)		(Name of each exchange on which registered)

Common Stock and Associated Preferred Stock Purchase Rights		New York Stock Exchange


PART I
	Item 1. Business
	Item 2. Properties
	Item 3. Legal Proceedings
	Item 4. Submission of Matters to a Vote of Security Holders
PART II
	Item 5. Market for Common Equity and Related Stockholder Matters
	Item 6. Selected Financial Data
	Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 7A. Quantitative and Qualitative Disclosures About Market Risk
	Item 8. Financial Statements and Supplementary Data
	Item 9. Changes in Accountants and Disagreements with Accountants on Accounting and Financial Disclosure
	Item 9A. Controls and Procedures
PART IV
	Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
EX-10.33 WAIVER AGREEMENT - JOHN A. A. BELLAMY
EX-10.34 ADDENDUM TO THE WAIVER AGREEMENT
EX-10.35 COLLABORATION AGREEMENT - PAIN THERAPEUTICS, INC.
EX-10.36 LICENSE AGREEMENT - PAIN THERAPEUTICS, INC.
EX-10.37 LICENSE AGREEMENT - MUTUAL PHARMACEUTICAL COMPANY, INC.
EX-10.38 JOHN A.A.BELLAMY SEVERANCE LETTER
EX-21.1 LIST OF SUBSIDIARIES
EX-23.1 CONSENT OF PRICEWATERHOUSECOOPERS LLP
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32.1 SECTION 906 CERTIFICATION OF THE CEO
EX-32.2 SECTION 906 CERTIFICATION OF THE CFO


		For the Years Ended December 31,

		2005		2004			2003

Branded pharmaceuticals		$	1,542,124	$	1,076,517		$	1,272,350
Meridian Medical Technologies			129,261		123,329			124,157
Royalties			78,128		78,474			68,365
Contract manufacturing			22,167		26,045			27,289
Other			1,201		(1	)		628

	Total	$	1,772,881	$	1,304,364		$	1,492,789


Product		Product Description and Indication

Cardiovascular/ Metabolic
Altace^®(1)		A hard-shell capsule for oral administration indicated for the treatment of hypertension and reduction of the risk of stroke, myocardial infarction (heart attack) and death from cardiovascular causes in patients 55 and over with either a history of coronary artery disease, stroke or peripheral vascular disease or with diabetes and one other cardiovascular risk factor (such as elevated cholesterol levels or cigarette smoking). Altace^® is also indicated in stable patients who have demonstrated clinical signs of congestive heart failure after sustaining acute myocardial infarction.
Corgard^®(2)		A beta-blocker tablet, indicated for the management of hypertension as well as long-term management of patients with angina pectoris.
Levoxyl^®		Color-coded, potency marked tablets indicated for thyroid hormone replacement or supplemental therapy for hypothyroidism.
Cytomel^®		A tablet indicated in the medical treatment of hypothyroidism. The only commercially available thyroid hormone tablet containing T(3) as a single entity.
Neuroscience
Sonata^®		A nonbenzodiazepine capsule treatment for insomnia.
Skelaxin^®		A muscle relaxant tablet indicated for the relief of discomforts associated with acute, painful musculoskeletal conditions.


	þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


	o	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


	•	sales and marketing,

	•	research and development,

	•	business development,

	•	manufacturing,

	•	packaging,

	•	distribution,

	•	quality control and assurance, and

	•	regulatory management.


	•	securing U.S. Food and Drug Administration, which we refer to as the “FDA,” approved new label indications;

	•	developing and producing different strengths;

	•	producing different package sizes;


	•	developing new dosage forms; and

	•	developing new product formulations.


	•	cardiovascular/metabolic;

	•	neuroscience;

	•	hospital/acute care; and

	•	other.


	•	AtroPen^® and ComboPen^®, nerve agent antidotes;

	•	the Antidote Treatment Nerve Agent Auto-injector, a nerve gas antidote utilizing Meridian’s patented dual chambered auto-injector and injection process; and

	•	auto-injectors filled with diazepam for treatment of seizures and morphine for pain management that are primarily sold to the U.S. Department of Defense (“DoD”) under an Industrial Base Maintenance Contract.


	•	the aging of the patient population, including diseases specific to the aging process and demographic factors, including obesity, diabetes, cardiovascular disease, and patient and physician demand for products that meet chronic or unmet medical needs;

	•	technological innovation, both in drug discovery and corporate processes;

	•	merger and acquisition activity whereby pharmaceutical companies are acquiring one another or smaller biotechnology companies and divestitures of products deemed “non-strategic”;

	•	cost containment and downward price pressure from managed care organizations and governmental entities, both in the United States and overseas;

	•	increased drug development, manufacturing and compliance costs for pharmaceutical producers;

	•	the rise of generic companies and challenges to patent protection and exclusivity;

	•	more frequent product liability litigation;

	•	increased governmental scrutiny of the healthcare sector, including issues of patient safety, cost, efficacy and reimbursement/insurance matters; and

	•	the cost of advertising and marketing, including direct-to-consumer advertising on television and in print.


	•	cardiovascular/ metabolic (including Altace^®, Corgard^®, Levoxyl^® and Cytomel^®),

	•	neuroscience (including Sonata^® and Skelaxin^®),

	•	hospital/ acute care (including Thrombin-JMI^®, Bicillin^®, Synercid^® and Intal^®), and

	•	other.


Product		Product Description and Indication

Hospital/ Acute Care
Thrombin-JMI^®		A chromatographically purified topical (bovine) thrombin solution indicated as an aid to hemostasis whenever oozing blood and minor bleeding from capillaries and small venules is accessible.
Synercid^®		An injectable antibiotic indicated for treatment of certain complicated skin and skin structure infections.
Bicillin^®		A penicillin-based antibiotic suspension for deep muscular injection indicated for the treatment of infections due to penicillin-G-susceptible microorganisms that are susceptible to serum levels common to this particular dosage form.
Intal^®		An oral multi-dose inhaler of a non-steroidal anti-inflammatory agent for the preventive management of asthma.
Tilade^®		An oral multi-dose inhaler of a non-steroidal anti-inflammatory agent for the preventive management of asthma.
Other
Menest^®		A film-coated esterified estrogen tablet for the treatment of vasomotor symptoms of menopause, atrophic vaginitis, kraurosis valvae, female hypogonadism, female castration, primary ovarian failure, breast cancer and prostatic carcinoma.
Delestrogen^®		An injectable estrogen replacement therapy.
Aplisol^®		Aids in the detection of infections with mycobacterium tuberculosis.
Neosporin^®(3)		A prescription strength ophthalmic ointment and solution indicated for the topical treatment of ocular infections. It is also formulated as a prescription strength genito-urinary concentrated sterile irrigant indicated for short-term use as a continuous irrigant or rinse to help prevent infections associated with the use of indwelling catheters.


Item 1.	*Business*


	General


	Generic Substitutes


	Patents, Licenses and Proprietary Rights


(1)	We acquired licenses for the exclusive rights in the United States under various patents to the active ingredient in Altace^®.

(2)	We acquired a fully paid license to Corgard^® in the United States.

(3)	We have exclusive licenses, free of royalty obligations, to manufacture and market prescription formulations of Neosporin^®.


	Net sales

	(in millions)
Cardiovascular/Metabolic
Altace^®	$	554.4
Levoxyl^®		139.5
Cytomel^®		36.2
Corgard^®		6.6
Neuroscience
Skelaxin^®	$	344.6
Sonata^®		83.2
Hospital/Acute Care
Thrombin-JMI^®	$	220.6
Bicillin^®		54.0
Synercid^®		12.4
Intal^®		12.2
Other
Aplisol^®	$	16.4
Neosporin^®		9.6
Menest^®		7.3
Delestrogen^®		6.2


	•	Remoxy^tm, an investigational drug for the treatment of severe to chronic pain, which is currently in Phase III clinical trials;

	•	Binodenoson, our next generation cardiac pharmacologic stress-imaging agent, which is currently in Phase III clinical trials;

	•	Vanquix^tm, a diazepam-filled auto-injector for the treatment of acute, repetitive epileptic seizures, which is currently in Phase III clinical trials;

	•	PT-141, an investigational drug for the treatment of ED and FSD, which is currently in late Phase II clinical trials;

	•	MRE0094, an investigational drug for the topical treatment of chronic diabetic neuropathic foot ulcers, which is currently in Phase II clinical trials; and

	•	T-62, an investigational drug for the treatment of neuropathic pain, for which we have completed Phase I clinical trials.


	•	a novel formulation involving ramipril for which an NDA is pending;

	•	an Altace^®/diuretic combination product;

	•	a large multinational study (DREAM) to evaluate the ability of Altace^® to prevent diabetes;

	•	a program to evaluate whether Altace^® slows the progression of chronic kidney disease, for which an sNDA was submitted to the FDA last year;

	•	a program to evaluate the safety and efficacy of Altace^® in children, for which an sNDA was submitted to the FDA last year, and for which we expect to receive an additional six months of patent exclusivity;

	•	a new formulation of Intal^®, for the long-term management of asthma, utilizing the environmentally friendly propellant hydrofluoroalkane (“HFA”); and

	•	a potential new formulation of metaxalone^®.


	*The securities and derivative litigation or the continuing SEC investigation could have a material adverse effect on our business.*


	If we cannot successfully enforce our rights under the patents relating to three of our largest products, Altace^®, Skelaxin^® and Sonata^®, and the patent relating to Adenoscan^®, or if we are unable to secure or enforce our rights under other patents, trademarks, trade secrets or other intellectual property, our results of operations could be materially adversely affected.


	We have entered into agreements with manufacturers and/or distributors of generic pharmaceutical products with whom we are presently engaged, or have been previously engaged in litigation, and these activities could subject us to claims that we have violated federal and/or state anti-trust laws.


	We cannot assure you that we will be able to comply with the terms and conditions of our corporate integrity agreement with the Office of Inspector General of the United States Department of Health and Human Services.


	*We are subject to the risk of additional litigation and regulatory proceedings or actions in connection with the restatement of prior period financial statements.*


	*We cannot assure you that we will be able to maintain effective internal control over financial reporting.*


	*If sales of our major products or royalty payments to us decrease, our results of operations could be materially adversely affected.*


	Although we have an obligation to indemnify our officers and directors, we may not have sufficient insurance coverage available for this purpose and may be forced to pay these indemnification costs directly. We may not be able to maintain existing levels of coverage, which could make it difficult to attract or retain qualified directors and officers.


	We are required annually, or on an interim basis as needed, to review the carrying value of our intangible assets and goodwill for impairment. If events such as generic competition or inability to manufacture or obtain sufficient supply of product occur that cause the sales of our products to decline, the intangible asset value of any declining product could become impaired.


	If we cannot implement our strategy to grow our business through increased sales, acquisitions, development and in-licensing, our business or competitive position in the pharmaceutical industry may suffer.


	•	Remoxy^tm, an investigational drug for the treatment of severe to chronic pain;

	•	binodenoson, a myocardial pharmacologic stress imaging agent;


	•	PT-141, an investigational new drug for the treatment of erectile dysfunction and female sexual dysfunction;

	•	T-62, an investigational drug for the treatment of neuropathic pain;

	•	MRE0094, an investigational drug for the topical treatment of chronic diabetic foot ulcers;

	•	a new inhaler for Intal^® using the alternative propellant HFA for which the FDA has issued an approvable letter;

	•	a potential new formulation of metaxalone;

	•	a novel formulation of ramipril for which an NDA is pending;

	•	an Altace^®/diuretic combination product; and

	•	Vanquix^tm, a diazepam-filled auto-injector.


	•	engage in product life-cycle management to develop new indications and line extensions for existing and acquired products,

	•	successfully develop, license or commercialize new products on a timely basis or at all,

	•	continue to develop products already in development in a cost effective manner, or

	•	obtain any FDA approvals necessary to successfully implement the strategies described above.


	•	develop or license their products more rapidly than we can,

	•	complete any applicable regulatory approval process sooner than we can,

	•	market or license their products before we can market or license our products, or

	•	offer their newly developed or licensed products at prices lower than our prices,


	If we cannot integrate the business of companies or products we acquire, or appropriately and successfully manage and coordinate third-party collaborative development activities, our business may suffer.


	*We do not have proprietary protection for most of our branded pharmaceutical products, and our sales could suffer from competition by generic substitutes.*